FOCUS: China to rule over Indonesia's oil and gas sector

Indonesia's oil and gas sector is still dominated by Western and Japanese firms, but the possibility of Chinese companies surpassing them someday is no longer unimaginable.

Chinese companies started establishing their foothold in Indonesia's oil and gas sector early this year by acquiring several oil and gas fields, but have since demonstrated their strong ambition for expansion in the sector. China, which is tipped to become the world's economic superpower in several decades, direly needs energy sources from other countries to support its economic progress.

This week, Indonesia is scheduled to sign a long-term contract to supply liquefied natural gas (LNG) to China's province of Fujian from the planned Tangguh LNG plant in Papua. Under the contract, sources said, China will be awarded with a stake in the gas fields that will supply natural gas to the LNG plant. This will significantly boost Chinese portfolio in the country's oil and gas industry.

Another project which Chinese firms are eying is the 1,100-kilometer gas transmission pipeline from oil and gas rich East Kalimantan to East Java to be built by state gas transmission and distribution company PT Perusahaan Gas Negara (PGN). It is one of the largest gas pipeline projects ever designed in Indonesia with an estimated cost of US$1.7 billion.

PGN president director WMP Simandjuntak made a visit to China on Sept. 14 to talk about the project with Chinese firms. During the visit, according to Simandjuntak, the country's major energy companies had shown him their interest to take part in the East Kalimantan-East Java gas pipeline project. They were China National Offshore Oil Corporation (CNOOC), PetroChina, China National Petroleum Corp (CNPC) and China Petroleum and Chemical Corporation (Sinopec). CNOOC is now Indonesia's largest offshore oil producer.

CNOOC and PetroChina are presently at the front ranks of Indonesia's energy producers, and, together, control about 12 percent of Indonesia's oil production of about 1.4 million barrels per day.

But, what had made Simandjuntak's visit to China even more significant was the fact that it took place about two weeks before the first meeting of the Indonesia-China Energy Forum, scheduled to take place in Bali this week. Some 150 participants, including 50 Chinese government officials and energy sector executives will attend the two-day meeting which will be opened on Sept 25. The forum was established by the Indonesian and Chinese governments during President Megawati Soekarnoputri's visit to China in March this year.

Again, in the Bali meeting the two parties will further discuss the East Kalimantan-East Java pipeline project plan, along with other high-profile plans like LNG supply to Fujian, cooperation in the power sector and coal production, and the $400 million soft loan to be provided by China for Indonesia to develop a power plant in Sumatra.

The two parties had been expected to sign memorandum of understandings (MOU) on those project plans.

Indonesia has apparently warmly welcomed the entry of Chinese energy companies into the country. Above all, some analysts say, Indonesia has apparently actively lured Chinese companies to boost their presence in the country's oil and gas sector. This is, the analysts say, because Indonesia wants to have a bigger market share in China's promising LNG market.

Simandjuntak however ruled out speculations that Indonesia was prioritizing Chinese companies over other companies in the East Kalimantan-East Java pipeline project.

"We have invited several parties, and China was not the only country expressing interest to take part in the pipeline project," Simandjuntak told Petromindo.Com, adding that aside from Chinese companies, a number of companies from other parts of the world, including Gaz de Franze, Italy's Saipem, TransCanada Pipeline and Petroworld from South Africa had shown interest in the project.

PGN's business development director, Adil Abas, unveiling the project plan, said the project could commence as early as 2005 and become onstream in 2007. He clearly said that Indonesia would offer China cooperation in the project completion.

Adil said the project would enable East Kalimantan oil and gas production sharing contractors like Unocal Indonesia, Vico Indonesia and TotalFinaElf E&P Indonesie to supply 700 million-1 billion standard cubic feet per day (MMSCFD) of gas to East Java.

Some analysts speculate that Chinese companies are not only eying a participation in the pipeline project but also a stake in the gas fields that will supply gas to the pipeline. They say BP Indonesia, which is the leader of the consortium possessing the Tangguh LNG project, and has now a good relation with Chinese firms, might consider to sell its stake in Vico so it could concentrate on its LNG project in Tangguh, Papua province.

But, a senior official at the BP Migas, which holds authority over the country's upstream sector, denied such a speculation.

"We've never heard such a speculation. But, we have asked BP to increase investment in Vico to boost its output," the official said. He however refused to unveil what is the consequence if BP refuses the order.

China's involvement in Indonesia's oil and gas sector began in January this year with CNOOC Ltdd.'s US$585 million purchase of Spanish company Repsol-YPF SA's lucrative oil and gas fields which scattered across the archipelago. The high-profile acquisition was followed in February by another high-profile New York Exchange listed PetroChina. Outbid for rivals to claim the Indonesian assets of Devon Energy Corp. for $262 million.

The acquisitions brought Chinese companies to the upper ranks of Indonesia's energy producers, with CNOOC now Indonesia's largest offshore oil producer.

Combined, CNOOC and PetroChina control about 12 percent of Indonesia's oil production of about 1.4 million barrels per day.

CNOOC acknowledged its interest to further expand its operation in Indonesia.

"After our successful acquisition of Indonesian assets, CNOOC Ltd has become the largest offshore producer in Indonesia. The company will make efforts in the areas of production sharing contracts and technical assistant contracts so as to explore the upside potential for the benefits of all parties," a CNOOC executive told Petromindo.Com in an e-mail interview.

Not only major companies, but also small and middle-sized companies from China are also interested to establish their foothold in the country's oil and gas sector. Executives of smaller companies from China have visited several parts of the country over the past months, probing into the possibility of taking part in Indonesia's energy sector projects.

In May this year, for instance, a six-member team from China's Tianjin Group led by its president Wang Hon Juan came to Muba Regency in South Sumatra to observe old oil wells in the area. The team's visit followed up on the previous visit to China of Muba top officials.

Are Western and Japanese companies, which have been dominating the country's oil and gas sector for several decades, worried about this?

None of them have thus far voiced such worries publicly but analysts say what happened on Sept. 9 at the PGN headquarters might tell something about it.

That day, the United States ambassador to Indonesia Ralph L Boyce signed a deal allowing the U.S. Trade and Development Agency to provide PGN with a $655,000 grant to finance the feasibility study for the East Kalimantan-East Java project. The signing of the deal took place several days before Simandjuntak went to China to ask Chinese companies to participate in the project.

Was the grant aimed at preventing PGN from offering the project to Chinese companies?

(leo/godang/robert)