Indonesia: The promise of LNG

Jun 18, 2004 02:00 AM

by Bill Guerin

Just as the liquefied-natural-gas industry in the Asia-Pacific region is poised for takeoff, Indonesia, the world's biggest LNG producer, needs to import up to 30 cargoes of the fuel from rival suppliers to meet contractual obligations with Taiwan, South Korea and Japan, which consumes nearly three-fourths of the region's total LNG supply.
Last year, Indonesia had to buy spot cargoes from Qatar and Nigeria to supply the same customers. These costly imports were also needed to feed Aceh's major fertilizer producers, which had to reduce their operations because of declining output from fields that feed the massive Arun LNG plant in Aceh.

The plant is 55 % owned by state oil and gas company Pertamina. Energy giant ExxonMobil supplies some 1.5 bn cfpd of gas to Arun from its onshore and offshore fields and has a 30 % stake in the plant. ExxonMobil has said it will still meet its commitment to ship 110 cargoes of LNG, or about 6.4 mm tons, this year.
Combined production fromArun and the Bontang LNG plant in Kalimantan is about 34 mm tpy, though only 26.5 mm tons was exported last year -- still a sizable chunk of the total 77.5 mm tons of LNG, worth nearly $ 20 bn, sold to Asian markets. Of this total, 55.8 mm tons was taken by Japan.
Consumption in the Asia-Pacific is expected almost to double by 2015. As LNG seems set for much higher demand and a future as a commercially and environmentally attractive mass-market fuel, Pertamina has been given back its concession and authority to explore for, produce, process and market LNG.

After the introduction of Law No 22/2001 on oil and gas, aimed at liberalization, the authority reverted to the government, which then created a new entity, the Oil and Gas Upstream Regulatory Agency (BP Migas). The 2001 law allowed private investors to engage in the distribution of oil and gas, which for decades had been the monopoly of Pertamina.
BP Migas has now appointed Pertamina as the sole agent to market LNG to these traditional markets. Minister of Energy and Mineral Resources Purnomo Yusgiantoro said the decision was made in view of Pertamina's experience in the conclusion and extension of gas sales contracts.

The future for Indonesia's gas industry is highly promising, with worldwide consumption of gas expected to more than double by 2030, and natural gas likely to surpass coal as the world's secondary energy source. Over the next seven decades, Indonesia may even usurp the Middle East as the world's largest gas exporter. Major gas deposits have been found in Papua and in many areas of Sulawesi. Large gas deposits have been found in Java, Bojonegoro and Seratung. South Sumatra also holds significant deposits.
But despite these significant natural-gas reserves, amounting to some 92.5 tcf, the country at present still relies on oil to supply about half of its energy needs. Substantial but declining oil production has even seen Indonesia become a net importer of crude oil after output recently fell below a million bpd.

Proven oil reserves of 5 bn barrels are predicted to run out in 10 years at current production rates of 350 mm barrels per year. Proven natural-gas reserves, on the other hand, will not be exhausted for 30 years at the current annual production rate.
An average of 2.8 tcf of natural gas is produced in Indonesia every day. Some 1.5 tcf is exported in the form of piped gas, LNG and LPG, with the remainder used for the domestic market.

As oil production has levelled off, efforts have been made to shift toward using natural-gas resources for power generation. However, distribution and transmission of natural gas have been hampered by a lack of infrastructure. Also, as in most of Asia, the distance of many demand centres from major gas fields has limited gas supply in Indonesia.
The government has recently issued interim permits to nine companies to distribute natural gas for industrial consumers. Most of these companies operate in West Java, where the country's main industrial belts are located. Since the companies have little infrastructure, they are being allowed to use gas pipelines owned by state gas-distribution firm PT Perusahaan Gas Negara.

LNG has been an expensive option in the past, unable to compete with oil-based fuels in the Indonesian domestic market because of the government's subsidy policy. Now, as the government is gradually scrapping the fuel subsidy, LNG looks like a viable alternative fuel for the local market, though massive investment will be needed for receiving terminals and deliquefaction facilities.
At its destination, LNG can be converted back to natural gas and used to fuel power plants. State electricity company PLN wants to reduce its dependence on coal for power generation and has just signed a cooperation agreement with Pertamina on the construction of an LNG terminal at Cilegon in West Java. The terminal, which will process gas to operate nearby steam-fired electricity turbines, needs an investment of up to $ 300 mm.

Pertamina has discovered huge gas reserves in Donggi in Sulawesi and also plans to build an LNG plant there, expected to come online in 2010. Officials are also considering the feasibility of developing an LNG terminal at the Marsela offshore gas discovery east of Timor in the Arafura Sea. The Marsela prospect is operated by Japanese exploration firm INPEX and has estimated gas reserves of 3 tcf.
There are currently more than 40 existing and proposed LNG plants around the world, and the massive Tangguh LNG project being developed by a consortium led by Anglo-British energy giant BP, in the Bird's Head area of Papua, will be Indonesia's third plant.

The bulk of Indonesia's total LNG exports go to Japan other than some 30 % to South Korea and Taiwan. However, as more offshore projects come online over the next five years and BP builds its Tangguh LNG plant, the country's traditional role of supplying these three markets will be expanded as North America takes more LNG from the Asia-Pacific.
BP and its partners, including CNOOC Ltd, China's largest offshore oil company, may invest as much as 40 % in equity for the Tangguh project. It will have a capacity of 7 mm tpy, and aside from boosting the country's LNG output, will generate revenue for Papua, one of the poorest regions in the country.

China may build up to nine LNG terminals in the next few years to promote the consumption of cleaner fuels, including one near Beijing by 2008, when the city hosts the Summer Olympic Games. In September 2002, China awarded an $ 8.5 bn LNG contract to Indonesia to supply its planned terminal in Fujian province for 25 years, beginning in 2007.
Last December BP Migas and BP Indonesia signed an agreement with US-based Sempra Energy to supply 500 mm cfpd of LNG from the Tangguh project. Under the agreement, 3.7 mm tons of LNG will be delivered annually from Tangguh, beginning in 2007, to Sempra's proposed LNG import and re-gasification terminal near Ensenada in Baja California, Mexico.

BP's partners in the Tangguh project are MI Berau (held by Mitsubishiand Inpex) with 16.30 %; CNOOC with 12.50 %; Nippon Oil Exploration Berau with 12.23 %; BG Group with 10.73 %; KG Companies (held by Japan National Oil Corp., Kanematsu and Overseas Petroleum) with 10 %; and LNG Japan Corp (held by Nissho Iwai and Sumitomo) with 1.07 %.
Mitsubishi's stake in the Tangguh project has driven its application to the US Federal Energy Regulatory Commission and California's Port of Long Beach Authority for a license to build a terminal to receive Indonesian LNG in southern California. The $ 400 mm facility could accommodate 5 mm tpy, could meet about 10 % of California's demand and could be completed by 2007.

To meet its long-term energy needs, Singapore is also planning to establish an LNG terminal to secure the supply of what is forecast to be the island's main fuel. The plant would enable Indonesia to send more gas to Singapore from other parts of the country in the form of LNG.
Singapore has been buying Indonesian natural gas delivered through underwater pipelines from Sumatra and West Natuna, but the amount of gas that can be transmitted in this way is limited. A recent disruption of this supply, which led to a blackout in the western part of Singapore, has caused concern there.

A decision on the project will be made after a feasibility study commissioned by the Ministry of Trade and Industry to determine the project's economic viability. If it goes ahead, the project is expected to cost at least S$ 1 bn ($ 588 mm) and would take five years to build.
Under new legislation enacted this year, 25 % of Indonesia's oil and gas must be sold on the domestic market. If LNG is to play a major role in the development of the domestic market while earning precious foreign exchange, Jakarta needs to secure additional financing for the multibillion-dollar costs of production facilities, upstream gas fields, shipping and re-gasification plants.

The government's main dilemma will be how to balance national interests, a controversial issue to say the least after regional autonomy, with the need to lure investors into the lucrative gas sector.
The adverse social and political costs of developing natural resources in a country where the infrastructure is adequate, but governance is weak and there is precious little sanctity of contract, at least in the eyes of foreign investors, makes this an extremely tough nut to crack.

Source: Asia Times
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