Mortars fired at Indonesian LNG plant force Exxon to shut it down

ExxonMobil's gas field on the island of Sumatra was hit by mortar fire in March. Live explosives landed inside the compound of a gas control centre, but its staff escaped injury.
Exxon's operations in Aceh, the northern tip of Indonesia, are being targeted in a guerrilla war waged by separatists against the Indonesian state. An Exxon plane was fired upon, wounding two local staff, company buses have been targeted with remote- controlled bombs planted in the road and other vehicles have been hijacked.
There have been 28 attacks over the past month -- fire fights, bombings and assaults on vehicles -- but the mortar attack early last month was particularly frightening, Bill Cumming, information officer for the oil company in Indonesia, says. "The facility was not designed to withstand military attack," he said. "If they had hit certain bits of equipment, there would have been a catastrophic explosion."
The control unit collects natural gas from Exxon's wells and cleans it for delivery to PT Arun NG L, a LNG plant owned by Pertamina, the Indonesian state energy company. The plant lowers the gas temperature to minus 160 degrees Celsius at which point it liquefies. It is then loaded on ships destined for power stations in Japan, Korea and Taiwan.

No one knows what might happen if an LNG plant were hit with explosives. A study on a receiving terminal in Boston suggested that the liquid fuel could spread for miles, freezing everything in its path. Only then would it vaporise and ignite.
Exxon is not hanging around to find out what really happens. On March 9 the company announced it was shutting down its operations in Aceh and pulling its staff out of the area. The conflict escalated, with the army accused of murdering three human-rights workers on an official visit to the region.
It is a bitter blow for the Americans. The PT Arun NGL plant was a "company maker" for Mobil, which discovered the Arun gas field. At its peak in the early 1990s, Arun was shipping 13 mm tons of LNG and the plant was delivering a quarter of Mobil's profits. Since then, production has been on the wane but last year the company loaded 117 cargoes, totalling some 6.5 mm tons.
Deutsche Bank's analysts reckon that ExxonMobil would have earned £ 500 mm this year from its Sumatra operation, until the shooting began. "They must be devastated (the plant) has stopped," Paul Sankey, oil analyst for Deutsche, says. "The plant is paid off. It's a money machine."
This is no local difficulty. LNG is critical to the world's energy security and Indonesia, racked by civil strife, is a big exporter. TotalFinaElf, the French oil and gas company is a big investor in Bontang, Indonesia's largest LNG plant, located on the eastern side of the island of Borneo.
Exporting 20 mm tpy of LNG, worth some $ 7 mm (£ 4.9 mm) per day in revenues, the plant is vital for Indonesia's financial security. However, the state of Kalimantan is no tropical paradise. Ethnic rivalry has led to a murderous campaign by indigenous Dayak tribal people against immigrants. So far the Bontang plant has escaped the turmoil.

East of Borneo, another troubled island is awaiting a big foreign investment. BP wants to develop Tangguh, a gas field in Irian Jaya. It is reputed to contain 18 t cu ft of reserves. An LNG plant will convert the gas molecules into dollar bills for BP. The market is likely to be China, where BP has just won a contract to build an LNG receiving terminal in Guangdong. Unfortunately, Irian Jaya is a political and social pressure cooker.
General Suharto, the former dictator, sought to dominate the remote islands of Indonesia's archipelago by colonising them with settlers from Java. The policy has brought open warfare to East Timor, guerrilla fighting to Aceh and civil strife in Borneo.
Many believe that Irian Jaya could become the next East Timor, with the local, Christian Papuan people turning on the Muslim settlers. There have already been riots and killings and last June a tribal conference demanded West Papuan independence. Like Aceh, the resentment is about the perceived plundering by Jakarta of the region's natural resources. The focus is the US mining company Freeport McMoRan and its Grasberg mine, a massive copper and gold deposit in the highlands. BP's Tangguh LNG project is unlikely to escape notice.

Oil companies are obvious targets and BP is taking a political risk with such high-profile investment in a troubled area. Exxon people have received threats of death and extortion. The Free Aceh Movement wants Exxon to pay a tax, claiming that revenue from the gas fields, most of which accrues to the Indonesian government, is rightfully theirs.
Exxon refuses to pay "any illegal fee or taxes" or to talk to the rebels. "We have received calls from people claiming to be separatists, but we have never initiated any contact with them," Cummings says. "Our partner is the Government of Indonesia and we don't get involved in internal politics in any of the 200 countries in which we operate." Exxon's orthodox "no politics" policy is the typically blinkered approach taken by multinationals in unstable countries. It is the same problem that has afflicted Shell in Nigeria, Rio Tinto in Papua New Guinea and almost every oil or mineral explorer across the globe. It is spreading to new areas.
LNG was once an exotic commodity, expensive and difficult to justify against cheap coal. A liquefaction plant can cost $ 1 bn and a fleet of four tankers, specially designed with pressure vessels to hold the frozen gas, might cost another bn. The world is changing in LNG's favour. Gas prices are rising and both China and India want to convert dirty, coal-based power stations to gas. Asia currently consumes about 72 mm tpy of LNG while the potential supply from Indonesia, Malaysia, Australia and as far west as Qatar and Oman is 86 mm tons. Within five years, Deutsche Bank forecasts demand to rise to 100 mm tons.

Asia needs LNG suppliers. The shutdown of PT Arun has sent the Japanese and Koreans scurrying to Petronas, the Malaysian state energy company, to fill the gap. The summer should not be a problem, but if Arun remains shut into the winter, buyers may have to look to the Middle East for replacement tons.
The multinationals are not sitting idle. In addition to BP's Tangguh, Shell has plans for a $ 10 bn LNG plant on the Russian-occupied island of Sakhalin, a short sea voyage to Korea and northern China. Plans are also in place to expand Australia's North West Shelf LNG project.
But the gas from these projects will not be shipped until the middle of the decade. By then we can expect demand from emerging markets like China and India to have soared.
An even bigger energy customer is likely to be combing the Asia/Pacific markets in the near future. In California the price of gas has reached absurd levels as the state staggers from brownout to blackout. El Paso said that it would import 5 mm tons of LNG from Australia in 2005.
In an attempt to avoid prohibitive Californian planning laws, El Paso will build its receiving terminal in Mexico and pipe gas into the US. "Economically, it makes sense, despite the distance," Sankey says. "The gas price in California has reached the equivalent of a $ 500 barrel of oil." Shell also has its eye on a Mexican beachhead to the US market.

Energy is a top priority for George W. Bush, so the State Department's eye could soon light on small places in Asia with big reserves of gas. When Aceh, Borneo, Irian Jaya or even Eastern Siberia becomes critical for the energy security of China, Japan and the US, the world needs to take note. The indigenous people of Aceh have already noticed.