BP may go ahead with LNG project despite short of buyers: Report

Oil and gas giant BP Plc. said it may go ahead with plans to build a US$2 billion liquefied natural gas facility even though supply of the commodity in the market currently exceeds demand, hoping it can win sales contracts before completion of the project in 2005, Bloomberg reported over the week-end.

BP and its partners in the Tangguh project in Irian Jaya province face competition from LNG suppliers in Russia, Australia, Malaysia and the Middle East. On the other hand, utilities in Japan and Korea, the biggest users of the fuel to fire power plants, will not commit to new contracts with plenty of supply available.

``If you add up all the numbers, there's a lot of LNG out there,'' said Bill Schrader, president of BP Indonesia. Still, the next project to go ``is about who builds the relationships with the right customers, and who's first to market.''

Companies building LNG plants normally lock in sales for more than half of output under 20-year contracts before going ahead. BP, Indonesia's state-owned oil company Pertamina, Mitsubishi Corp. and other partners in Tangguh haven't signed any customers, with less than a year before they have to give the go ahead to build the plant on schedule.

``A consensus has been built among the partners that timing (speed) is what must be considered to be the most important,'' said Kenny Harada, general manager of Kanematsu Corp.'s LNG Business Department. Kanematsu is a partner in the project through its joint ownership of KG Petroleum Ltd. with Japan National Oil Co. and Overseas Petroleum Corp.

``We must take some risk to accomplish the plant as initially scheduled,'' Harada said.

Much of what is driving BP and its partners in the Tangguh plant is competition for China's market.

China is building its first LNG import terminal in Guangdong province, and sellers have been wooing the country with offers of stakes in natural gas fields to be connected to LNG plants.

Both BP and Chevron Corp. are in talks with China's No. 3 oil company, CNOOC Ltd., about taking stakes in their fields in Indonesia and Australia. BP is also building the terminal in Guangdong and will own 30 percent when it is completed. CNOOC will own the remainder.

Gas projects in Australia, the Middle East, Russia and the rest of Asia may increase regional LNG output to 146.5 million tons a year by 2010, compared with forecast regional demand of 130 million tons, according to CIBC World Markets.

Tangguh in Indonesia's easternmost province of Irian Jaya aims to ship as much as 8 million metric tons of LNG a year, worth more than $1.8 billion a year at current prices.

Guangdong will take 3 million tons of LNG a year, worth more than $700 million at current prices.

China's LNG demand is forecast to rise to 10 million tons a year by 2010 as it plans to quadruple to 8 percent the share of gas in its energy supply, partly to cut pollution from burning coal and oil.

BP is also targeting buyers in India, Japan, South Korea, Taiwan and the U.S. West Coast, Schrader said.

BP and its partners plan to open the Tangguh plant with two LNG production lines, or trains, of 3 million to 4 million tons each, Schrader said.

Mitsubishi Corp. has 16 percent of the project, Nippon Mitsubishi Oil Corp. 12 percent, BG Group Plc 11 percent, KG Petroleum Ltd. 10 percent, and Nissho Iwai Corp 1 percent.

BP, the operator, holds 50 percent of the project's proven gas reserves of 14.4 trillion cubic feet(*)