FOCUS: Benefits and disadvantage of the Tangguh LNG project

By: Hans Bodega

The Tangguh liquefied natural gas (LNG) project will bring about billions of dollars of income for the Papua province, strengthen Indonesia's competitiveness in the regional LNG market, but, as a negative impact, will force other LNG producers of the country to cut down their price.

London-based energy giant BP PLC and its consortium partners plan to build four trains with a combined capacity of 14 million tons annually at the Tangguh complex. Two trains with a combined capacity of seven million tons will be soon be built following the signing of the sales of purchase contract with China's energy giant China National Offshore Oil Corporation (CNOOC) last week for the 2.5 million annual supply to China's Fujian province. The consortium has to send the first LNG to the province in 2007.

BP has 50 percent of the 14.4 trillion cubic feet of gas reserves found at gas fields at Berau Bintuni Bay that will feed the Tangguh plant. The balance is shared by Mitsubishi (16 percent), Nippon Oil Corporation (12 percent), British Gas (11 percent), Kanematsu Corp. (10 percent) and LNG Japan (1 percent). CNOOC will acquire 12.5 percent stake in the reserves.

According to the government and BP, the Fujian contract, which was signed last Thursday, alone with generate $8.5 billion in sales revenue throughout the contract period of 25 years, while the two trains will generate a total of 21 billion in revenue at full capacity. Four trains will reportedly generate an estimated $45 billion in sales revenue.

Philippine electricity firm GN Power has voiced interest to buy 1.5 million tons annually from the plant. The final deal with the Philippine firm is expected to be signed next year. The remaining excess capacity of two trains totaling three million tons annually will be sold to other markets, such as India, Taiwan, Japan, the United States' West Coast and Java, which are being explored by the consortium.

No details are yet available on the total revenue to be received by Papua.

Under the production sharing contract, 70 percent of the net gas revenue will go to the Indonesian government, while BP and its consortium partners, as contractors, keep the remaining 30 percent. No details about the net revenue have been publicly released, but the amount is the sales revenue minus the investment that had been spent by the contractors for exploration and the costs for the construction of the plant.

BP Indonesia's vice president Satya Widya Yudha said total expenditure for explorations stood at $600 million, but several legislators estimated the expenditure at $2 billion. Investment for the construction of the two trains is estimated at $2 billion. The higher the expenditure, the lower the revenue to be received by the government.

Under the intergovernmental fiscal balance law No. 25/1999, regions are entitled to 30 percent of the government's gas revenue and 15 percent of its oil revenue. As far as the Papua province is concerned, the House of Representatives passed last year a special law on the province's autonomy, which stipulates among others 70 percent of the oil and gas revenue earned by the government from the province would be returned to the province. The new revenue sharing formula will be implemented over a period of 25 years to allow the province, which is considered to the country's least developed area, to catch up with the more advanced provinces of the republic.

Analysts estimated that the province will receive billions of dollars in revenue from the plant. The windfall will certainly add the province's capability of improving the welfare of its population, which now total 2.1 million.

"This project will bring about an extraordinary impact on Papua and Indonesia," Papua's governor Jaap P. Solossa declared enthusiastically last Thursday, while accompanying the Indonesian and Chinese officials to report the signing of the contract to President Megawati Soekarnoputri.

Trijana Kartoatmodjo, an expert staff at the oil and gas upstream authority BP Migas, who is also the chief negotiator for the Fujian LNG contract, told Petromindo.Com that under the production sharing contract, in the first year of production, 80 percent of the Tangguh plant revenue would be used to pay out the costs that had been spent by contractors for exploration and the construction of the plant. The remaining 20 percent of the revenue would be shared by the government and the BP-led consortium. The former will receive 14 percent, the latter 6 percent.

This means the Papua province will enjoy its income from the plant from the first year of production.

Trijana estimated that all exploration and construction costs would be fully paid out after six years of production.

Aside from the money aspect, the development of the Tangguh LNG plant will make Indonesia's position stronger in the increasingly competitive LNG market of the region.

"The Tangguh LNG project will become Indonesia's third LNG facility and will strengthen Indonesia's position as the largest producer and exporter of LNG in the world," Rachmat Sudibyo, BP-Migas chairman, said during the signing of the Fujian supply contract.

Indonesia has already two LNG plants in Arun, Aceh and Bontang, East Kalimantan respectively. The Badak LNG plant in Bontang is the world's largest with eight trains.

Some analysts say with three LNG centers in place, Indonesia will have a greater capability to cope with possible production troubles in the future. If one LNG center experiences a trouble and can not fulfill its supply obligation, other centers can step in to cover the supply obligation. Indonesia's LNG competitors, including Australia, Malaysia and Qatar, have respectively only one LNG center.

Thus, theoretically, the analysts argue, the development of the Tangguh LNG plant will increase Indonesia's competitiveness in the fights for new orders in the future.

But, despite the above benefits, other LNG producers and legislators have voiced concerns over the Tangguh LNG 's low price. This will provide a reason for customers of the LNG produced at other plants of the country to ask for a lower price, comparable to the Tangguh price. Reports said the Japanese buyers already indicated that they wanted the Badak LNG plant to lower its price during negotiations over the extension of sales and purchase contracts.

Rumors in the industry said CNOOC will buy the Tangguh LNG at about $2.6 per million British thermal unit (MMBTU), which Minister Purnomo refused to confirm. He only said the price was "below $3", which is lower than the price of above $3 for the Badak LNG.

Legislator Achmad Farial said the consequence of the low price is the government will receive a lower revenue from the Badak LNG in the future.

However, Purnomo dismissed any ideas that blame the Tangguh LNG plant for the future decrease in the LNG revenue.

"The reality now is that the LNG market in the region is a buyers' market due to the oversupply. Different from the past, buyers now have a bigger bargaining position in determining the price. Whether or not there is the Tangguh plant, the price is decreasing because of this situation," Purnomo said during the First China-Indonesia Energy Forum in Bali last Wednesday. (Alex contributes to this article)