After a series of environmental, funding and supply contract problems, surging regional demand has given new impetus to Indonesia's US$6.5 billion Tangguh liquefied natural gas (LNG) project, which with 14 trillion cubic feet of proven reserves represents one of the largest gas fields in all Asia. Energy Minister Purnomo Yusgiantoro said last week that the first LNG deliveries from the plant are now expected to start by the end of next year. The gas will help China, the second biggest investor in the ambitious project, to meet its surging energy demand while at the same time tap a valuable new fuel source to power Indonesia's domestic economy.
The announcement comes amid surging global LNG prices, which have more than doubled over the past three years. The initial output of the two planned LNG production lines, or trains, as they are known in industry parlance, will be a combined 7.6 million metric tons per year, an output that has been fully contracted for the next 25 years. The gas will flow from two unmanned offshore production platforms through sub-sea pipelines to an LNG processing facility on the Papua mainland. From there, super-cooled gas will be exported from a tanker terminal directly to buyers, including a contracted 2.6 million tons to an LNG terminal on the coast of the southeastern Chinese province of Fujian.
Another 3.7 million tons is scheduled to be sent to Sempra Energy's Baja California terminal on the western coast of Mexico as well as 1.1 million metric tons to South Korea to supply steelmaker Posco and SK Power. Industry analysts note that previous upbeat announcements about bringing Tangguh on line have been followed by delays rather than actual production. A supposed final decision to go ahead with the project came in March 2005, when LNG exports were predicted to start flowing in 2007. That timetable wasn't met due to funding and supply contract problems. The project's operator and biggest investor with a 37% stake is Anglo-American energy giant BP and is run through its local Indonesian unit, BP Indonesia, and in partnership with state-owned energy company Pertamina.
State-owned China National Offshore Oil Corp (CNOOC) has nearly 17% and several Japanese oil companies and trading houses hold the remaining equity. Earlier this month Kanematsu Corp announced the sale of 10% of its total stake in Tangguh to affiliates of Nippon Oil and Mitsui. Nippon Oil's stake in Tangguh will rise slightly from 12.2%, to 13.5%, while Mitsui and Mitsubishi will now hold just under 10% each. Amid the shifting ownership, the cost of the project has rocketed from an estimated US$2 billion in 2002 to more than $5 billion at present. The $3.5 billion funding target was finally met in August this year, when BP announced it had secured an extra $884 million in funds from banks in China, Japan and Europe. The $2.6 billion of funding secured earlier included $1.2 billion from the Japan Bank for International Cooperation, $1.1 billion secured from several other funding sources and $350 million from the Asian Development Bank (ADB).
The China factorChina is boosting its use of gas for power generation and industry with an eye on reducing it's current reliance on coal. The country's first ever deal to import foreign-produced LNG, a 3.3 million ton per year tender for southern Guangdong province, went in August 2002 to a consortium led by Australian energy giant Woodside Petroleum Ltd. The loss of this supply tender was at the time a major blow to BP and Pertamina because they had jointly planned to start shipping gas from Tangguh to Guangdong in early 2006 and could not start the plant until the majority of its output had been contracted. The powerful Golkar political party slammed then president Megawati Sukarnoputri' s administration for what it deemed poor judgment in sending a delegation led by her husband, Taufik Kiemas, to Beijing to lobby for the Guangdong contract. CNOOC first purchased a 12.5% share in Tangguh from BP for US$275 million in February 2003.
Shortly thereafter, it was announced that Tangguh had been awarded China's second major LNG import deal, the 25-year supply contract to an LNG terminal in Fujian province. The deal was negotiated by Indonesia's oil and gas regulator BP Migas and Pertamina. Some industry analysts speculate that efficiently tapping Tangguh could return Indonesia to its position as the world's leading LNG exporter, a claim it lost to Qatar in only recently. Pertamina pioneered and dominated the regional LNG market for over 25 years, until its monopoly on marketing LNG overseas was lost in 2001. The state entity then changed tack, when in 2002 then president director Baihaki Hakim urged a refocus on LNG production for the domestic market to avoid future scarcities. Indonesia is the Asia Pacific's only Organization of the Petroleum Exporting Countries (OPEC) member, yet has much larger reserves of natural gas than oil.
The government is developing the domestic gas market to move away from its current reliance on its depleting oil reserves as the country's main energy source. In that direction, legislation enacted in 2004 mandated that 25% of domestic oil-and-gas must be sold to local markets. At the end of last year, Indonesia had total reserves of some 93 trillion cubic feet of recoverable natural gas, according to BP statistics. But much of its natural gas is exported by major foreign producers under production sharing contracts (PSC). Total, Indonesia's biggest gas producer, for example, pumps around 2.6 billion cubic feet of gas a day from two separate fields, most of which supplies the Bontang LNG plant in East Kalimantan. Exports from the country's other LNG liquefaction plants, in Arun and Bontang, have steadily declined as the dwindling production from aging fields was diverted to meet local demand. Phillip Armand, president of Total's Indonesian unit Total E&P Indonesie, has said the company expects to start producing 400 million cubic feet natural gas a day, at peak levels, from two new fields in East Kalimantan by the end of this year, to offset lower outputs. Questionable commitmentsShortfalls in export supplies have been met on occasion by spot market purchases as contractual commitments to traditional markets in Japan, South Korea and Taiwan have been threatened by local shortages.
Most of these contracts, supplied from the Bontang and Badak fields, are due to expire in 2010. With no new additional gas sources due to come on stream, these contracts will likely not be extended. And senior energy officials' attitude to these still valid contracts raises questions about the government's future commitment to LNG export markets. Purnomo has been reported saying in the past that if current contracts to these traditional buyers can not be renegotiated in terms of supply volumes that Indonesia should seek out LNG supplies from other countries for resale to these buyers to meet projected shortfalls in 2007, 2008 and 2009. The idea that Indonesia, until recently the world's biggest LNG exporter and with several standing long-term contractual commitments, should aim to play a broker's role, some analysts say, sends a mixed signal to large volume LNG buyers in the region. Pertamina, at least, continues to move forward with its ambiguous support for boosting supply to both domestic and overseas markets. Last month the state-owned concern secured a 25% interest in a Qatar onshore oil block, which will be operated by Germany's Wintershall, and which Pertamina will invest $11 million as part of a total $47 million exploration budget. The Tangguh project could still face problems back in Jakarta, however. The House of Representatives has set up a special team made up of members of the Supreme Audit Agency, legislators and government officials to look into its contracted LNG prices amid claims that the average $3.5 per MMBTU (metric million British thermal units) prices are far lower than the domestic gas price. Purnomo has been quoted in local media as saying that this is just a free on board (FOB) price, while delivered prices can be as much as $7 to $9 per MMBTU. Indonesia's LNG contract prices have always been pegged to a maximum oil price ceiling. The current administration of president Susilo Bambang Yudhoyono has already renegotiated Tangguh contract prices with two big Korean buyers to a reported $3 to $3.5 per MMBTU, on the basis that crude oil prices have more than trebled since the original contracts were signed. Similar reviews of contract prices with US-based Sempra Energy resulted in a new price of just under $6 per MMBTU, according to industry sources. Even the contract with CNOOC, which when brokered seemed etched in stone, was last year renegotiated to a price level of $3.35 per MMBTU, according to local media.
Purnomo indicated in September 2002 that the Fujian price was worth $21 billion over 25 years, although the contract prices at the time were lower than US$3 per MMBTU. CNOOC, meanwhile, is locked in a contract dispute of a different kind after being sued in June by Canada's major oil-and-gas producers Talisman Energy Inc, which has claimed right to a 44% participating share of CNOOC's interest in Tangguh through Talisman's Fortuna Resources. Talisman claims CNOOC failed to offer it this share, conferred under its rights to assets in the Indonesian American Petroleum Company drawn up almost four decades ago, and Warrior International Corp, which eventually through acquisitions became to be known as Talisman. CNOOC has filed a counterclaim against another Talisman unit, Paladin Resources, and the suit is expected to be heard in March next year. It's still unclear if those legal troubles will impact on CNOOC's future commitment to funding Tengguh. CNOOC has recently said it will buy 25 million tons of LNG annually by 2010 to help meet China's huge and growing energy demand. At the same time, Indonesia's other traditional buyers are busy chasing new LNG contracts in Indonesia. For instance, Japan plans a major LNG-related investment on Sulawesi island, where Mitsubishi, along with Pertamina and publicly listed Medco Energi, plan to build a new $1 billion LNG plant. The plant's total output of 2 million tons per year will be exported to Japan, according to the terms of an agreement signed in August by then Japanese prime minister Shinzo Abe during a three-day visit to Indonesia.
Construction will begin in mid-2008 and is expected to be completed by 2010. South Korea is currently the world's biggest LNG importer and now takes annually around 5 million tons of the fuel from Indonesia. It's state-owned Korea Gas Corp (KOGAS) announced in April this year that it would buy LNG from Tangguh if expansion were to go ahead. This was agreed to during a visit by a high-powered South Korean business delegation, of which senior KOGAS officials said they were looking to invest in upstream activities in the Natuna field in the South China Sea and other areas of the country. Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at http://sg.f586.mail.yahoo.com/ym/Compose?To=softsell%40prima.net.id.
The announcement comes amid surging global LNG prices, which have more than doubled over the past three years. The initial output of the two planned LNG production lines, or trains, as they are known in industry parlance, will be a combined 7.6 million metric tons per year, an output that has been fully contracted for the next 25 years. The gas will flow from two unmanned offshore production platforms through sub-sea pipelines to an LNG processing facility on the Papua mainland. From there, super-cooled gas will be exported from a tanker terminal directly to buyers, including a contracted 2.6 million tons to an LNG terminal on the coast of the southeastern Chinese province of Fujian.
Another 3.7 million tons is scheduled to be sent to Sempra Energy's Baja California terminal on the western coast of Mexico as well as 1.1 million metric tons to South Korea to supply steelmaker Posco and SK Power. Industry analysts note that previous upbeat announcements about bringing Tangguh on line have been followed by delays rather than actual production. A supposed final decision to go ahead with the project came in March 2005, when LNG exports were predicted to start flowing in 2007. That timetable wasn't met due to funding and supply contract problems. The project's operator and biggest investor with a 37% stake is Anglo-American energy giant BP and is run through its local Indonesian unit, BP Indonesia, and in partnership with state-owned energy company Pertamina.
State-owned China National Offshore Oil Corp (CNOOC) has nearly 17% and several Japanese oil companies and trading houses hold the remaining equity. Earlier this month Kanematsu Corp announced the sale of 10% of its total stake in Tangguh to affiliates of Nippon Oil and Mitsui. Nippon Oil's stake in Tangguh will rise slightly from 12.2%, to 13.5%, while Mitsui and Mitsubishi will now hold just under 10% each. Amid the shifting ownership, the cost of the project has rocketed from an estimated US$2 billion in 2002 to more than $5 billion at present. The $3.5 billion funding target was finally met in August this year, when BP announced it had secured an extra $884 million in funds from banks in China, Japan and Europe. The $2.6 billion of funding secured earlier included $1.2 billion from the Japan Bank for International Cooperation, $1.1 billion secured from several other funding sources and $350 million from the Asian Development Bank (ADB).
The China factorChina is boosting its use of gas for power generation and industry with an eye on reducing it's current reliance on coal. The country's first ever deal to import foreign-produced LNG, a 3.3 million ton per year tender for southern Guangdong province, went in August 2002 to a consortium led by Australian energy giant Woodside Petroleum Ltd. The loss of this supply tender was at the time a major blow to BP and Pertamina because they had jointly planned to start shipping gas from Tangguh to Guangdong in early 2006 and could not start the plant until the majority of its output had been contracted. The powerful Golkar political party slammed then president Megawati Sukarnoputri' s administration for what it deemed poor judgment in sending a delegation led by her husband, Taufik Kiemas, to Beijing to lobby for the Guangdong contract. CNOOC first purchased a 12.5% share in Tangguh from BP for US$275 million in February 2003.
Shortly thereafter, it was announced that Tangguh had been awarded China's second major LNG import deal, the 25-year supply contract to an LNG terminal in Fujian province. The deal was negotiated by Indonesia's oil and gas regulator BP Migas and Pertamina. Some industry analysts speculate that efficiently tapping Tangguh could return Indonesia to its position as the world's leading LNG exporter, a claim it lost to Qatar in only recently. Pertamina pioneered and dominated the regional LNG market for over 25 years, until its monopoly on marketing LNG overseas was lost in 2001. The state entity then changed tack, when in 2002 then president director Baihaki Hakim urged a refocus on LNG production for the domestic market to avoid future scarcities. Indonesia is the Asia Pacific's only Organization of the Petroleum Exporting Countries (OPEC) member, yet has much larger reserves of natural gas than oil.
The government is developing the domestic gas market to move away from its current reliance on its depleting oil reserves as the country's main energy source. In that direction, legislation enacted in 2004 mandated that 25% of domestic oil-and-gas must be sold to local markets. At the end of last year, Indonesia had total reserves of some 93 trillion cubic feet of recoverable natural gas, according to BP statistics. But much of its natural gas is exported by major foreign producers under production sharing contracts (PSC). Total, Indonesia's biggest gas producer, for example, pumps around 2.6 billion cubic feet of gas a day from two separate fields, most of which supplies the Bontang LNG plant in East Kalimantan. Exports from the country's other LNG liquefaction plants, in Arun and Bontang, have steadily declined as the dwindling production from aging fields was diverted to meet local demand. Phillip Armand, president of Total's Indonesian unit Total E&P Indonesie, has said the company expects to start producing 400 million cubic feet natural gas a day, at peak levels, from two new fields in East Kalimantan by the end of this year, to offset lower outputs. Questionable commitmentsShortfalls in export supplies have been met on occasion by spot market purchases as contractual commitments to traditional markets in Japan, South Korea and Taiwan have been threatened by local shortages.
Most of these contracts, supplied from the Bontang and Badak fields, are due to expire in 2010. With no new additional gas sources due to come on stream, these contracts will likely not be extended. And senior energy officials' attitude to these still valid contracts raises questions about the government's future commitment to LNG export markets. Purnomo has been reported saying in the past that if current contracts to these traditional buyers can not be renegotiated in terms of supply volumes that Indonesia should seek out LNG supplies from other countries for resale to these buyers to meet projected shortfalls in 2007, 2008 and 2009. The idea that Indonesia, until recently the world's biggest LNG exporter and with several standing long-term contractual commitments, should aim to play a broker's role, some analysts say, sends a mixed signal to large volume LNG buyers in the region. Pertamina, at least, continues to move forward with its ambiguous support for boosting supply to both domestic and overseas markets. Last month the state-owned concern secured a 25% interest in a Qatar onshore oil block, which will be operated by Germany's Wintershall, and which Pertamina will invest $11 million as part of a total $47 million exploration budget. The Tangguh project could still face problems back in Jakarta, however. The House of Representatives has set up a special team made up of members of the Supreme Audit Agency, legislators and government officials to look into its contracted LNG prices amid claims that the average $3.5 per MMBTU (metric million British thermal units) prices are far lower than the domestic gas price. Purnomo has been quoted in local media as saying that this is just a free on board (FOB) price, while delivered prices can be as much as $7 to $9 per MMBTU. Indonesia's LNG contract prices have always been pegged to a maximum oil price ceiling. The current administration of president Susilo Bambang Yudhoyono has already renegotiated Tangguh contract prices with two big Korean buyers to a reported $3 to $3.5 per MMBTU, on the basis that crude oil prices have more than trebled since the original contracts were signed. Similar reviews of contract prices with US-based Sempra Energy resulted in a new price of just under $6 per MMBTU, according to industry sources. Even the contract with CNOOC, which when brokered seemed etched in stone, was last year renegotiated to a price level of $3.35 per MMBTU, according to local media.
Purnomo indicated in September 2002 that the Fujian price was worth $21 billion over 25 years, although the contract prices at the time were lower than US$3 per MMBTU. CNOOC, meanwhile, is locked in a contract dispute of a different kind after being sued in June by Canada's major oil-and-gas producers Talisman Energy Inc, which has claimed right to a 44% participating share of CNOOC's interest in Tangguh through Talisman's Fortuna Resources. Talisman claims CNOOC failed to offer it this share, conferred under its rights to assets in the Indonesian American Petroleum Company drawn up almost four decades ago, and Warrior International Corp, which eventually through acquisitions became to be known as Talisman. CNOOC has filed a counterclaim against another Talisman unit, Paladin Resources, and the suit is expected to be heard in March next year. It's still unclear if those legal troubles will impact on CNOOC's future commitment to funding Tengguh. CNOOC has recently said it will buy 25 million tons of LNG annually by 2010 to help meet China's huge and growing energy demand. At the same time, Indonesia's other traditional buyers are busy chasing new LNG contracts in Indonesia. For instance, Japan plans a major LNG-related investment on Sulawesi island, where Mitsubishi, along with Pertamina and publicly listed Medco Energi, plan to build a new $1 billion LNG plant. The plant's total output of 2 million tons per year will be exported to Japan, according to the terms of an agreement signed in August by then Japanese prime minister Shinzo Abe during a three-day visit to Indonesia.
Construction will begin in mid-2008 and is expected to be completed by 2010. South Korea is currently the world's biggest LNG importer and now takes annually around 5 million tons of the fuel from Indonesia. It's state-owned Korea Gas Corp (KOGAS) announced in April this year that it would buy LNG from Tangguh if expansion were to go ahead. This was agreed to during a visit by a high-powered South Korean business delegation, of which senior KOGAS officials said they were looking to invest in upstream activities in the Natuna field in the South China Sea and other areas of the country. Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at http://sg.f586.mail.yahoo.com/ym/Compose?To=softsell%40prima.net.id.
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