FOCUS: Troubles of keeping Indonesia LNG business going
Sunday, October 6 2002 - 05:20 PM WIB
As the world?s largest liquefied natural gas (LNG) exporter, Indonesia will have to work hard to maintain the existing sales and purchase contracts with buyers and explore new markets, including the domestic market, in the coming years.
Otherwise, analysts say, by the end of this decade, the country?s LNG industry could experience a huge excess capacity and producers will keep several LNG trains idle.
As a matter of fact, two of the six LNG trains operated by the Arun NGL Corp. in Aceh have been kept idle for about two years following a shortage of natural gas supply. ExxonMobil Corp., which supplies natural gas to the plant, has suspended gas exploration and production for several areas in the province due to security concerns.
The Tangguh LNG plant in the Bird?s Head area of Papua, where the British-Japanese consortium led by BP PLC has planned to build two LNG trains with the capacity of seven million tons per annum (MTA) in the first phase, has thus far secured a contract to 2.6 MTA to China?s province of Fujian starting 2007. The Philippine firm GN Power wanted to buy 1.5 MTA from Tangguh, but no sales and purchase agreement has been signed.
Another LNG producer, PT Badak NGL Corp. in Bontang, East Kalimantan, is facing the fact that its contracts with several Japanese buyers, including Kansai Electric, Kyushu Electric, Nippon Steel, Tohoku and Tepco, will expire in 2010. The contracts cover a total supply of 10.15 MTA.
Analysts estimate that if the contracts with the Japanese buyers are not extended and BP can?t find other buyers for its Tangguh LNG aside from the Fujian province, Indonesia?s LNG industry will experience excess capacity of some 28.9 MTA in 2010.
The calculation is based on the fact that Indonesia currently has LNG production capacity of 31.6 million MTA. By 2010, the volume is estimated to amount to 41.9 MTA, while LNG contracts still effective after 2010 is estimated to reach 12.55 MTA only. Of the 41.9 MTA, 21.64 MTA from the eight trains in Bontang, 12.85 MTA from six trains in Arun, and 7 MTA from two trains in Tangguh.
Minister of Energy and Mineral Resources Purnomo Yusgiantoro knows that it is crucial for Indonesia to maintain relations with Japanese LNG buyers to keep most of its LNG trains in operation.
The minister says that the government will have to continue encouraging Japanese buyers to bring in more and more LNG from Indonesia. Japan is the world?s largest LNG importer and Indonesia?s largest LNG buyer.
?The government hopes that Japan will increase LNG imports from Indonesia this year and in the years to come,? Purnomo said recently.
But, in reality, president director of state oil and gas firm Pertamina, Baihaki Hakim, said not all the Japanese buyers would likely agree to extend the contracts. Those agreeing to extend their contracts would likely be ?Western? buyers of Japan such as Osaka Gas, Kansai Electric, Power & Co, Kyushu Electric and Chubu Electric. Their contracts involve only around six MTA.
Baihaki admitted that Pertamina, which signed LNG supply contracts with the Japanese buyers, had not yet taken anticipatory measures to deal with LNG excess capacity in 2010.
Pertamina?s uncertainty about LNG supply contracts with Japanese buyers has caused the company to delay its plan of building the ninth LNG train, dubbed Train I, in Bontang.
So far, other Japanese buyers have given no clear-cut explanation as to why they had not considered extending their LNG purchase contracts with Indonesia.
But reports said that the Japanese importers prefer short-term LNG supply and purchase contracts so that contract volumes and prices can be reviewed swiftly when necessary. So far, Indonesia?s LNG contracts with Japanese buyers are effective for no less than 20 years.
The Japanese buyers were also said as demanding LNG price cuts in renewed contracts. Tokyo Electric and Tokyo Gas recently won LNG price cuts of about 5 percent when they renewed 20-year contracts with Malaysia?s national petroleum company Petronas for 15 years starting April 2003.
Meanwhile, it remains unclear whether the shift in Japanese LNG buyers? preferences is related to factors like the planned increase in the consumption of nuclear-based electricity.
Reports said that as many as 13 new nuclear power stations will be constructed in Japan, and that they will start operation by 2010.
Japan?s government officials argue that it has a good record on nuclear safety, and that nuclear energy is a very stable and important source of electricity. Presently, 36 percent of electricity is provided by nuclear energy.
Analysts say another factor behind the alleged consideration not to extend LNG contracts with Indonesia is the possibility of constructing a cross-border gas pipeline from Russia?s Sakhalin to Japan. Although a feasibility study on the prospective project is being carried out, some Japanese officials say it is still at an early stage so that they cannot predict the results.
Sjahrial Daud, expert staff to Pertamina?s president, said he believed Japan would shelve its plan of building the nuclear-power project due to the strong pressure from the public who are still traumatized over the impact of the nuclear bombing by the United States of Hiroshima and Nagasaki in the World War II.
This, coupled with the country?s economic growth, will increase Japan?s LNG demand by 9 and 10 percent in 2010, he said.
But, he said, the growth of the LNG demand could be suppressed if Japan realizes its plan of building the Sakhalin-Japan gas pipeline.
Sjahrial predicted LNG demand will also increase in South Korea, Taiwan and China. China, he said, will become a large market comparable to Japan.
But, analysts say that competition from other LNG producing countries like Australia, Qatar and Malaysia could make it increasingly difficult for Indonesia to export more LNG to those countries in the future.
In August, Indonesia lost to an Australian consortium in a tender to supply some three million tons of LNG per year to China?s Guangdong province over a 25-year period. Together with Qatar, the two countries had been shortlisted in the LNG supply tender.
Although China later awarded Indonesia a 20-year contract to supply 2.5 million tons of LNG per year to Fujian, another China province, observers say it is no guarantee that Indonesia would smoothly find new LNG markets in China, notably in its southeastern coastal provinces, in the future. This is because Australia, Qatar and even Malaysia would try their best to sell more and more LNG in that country.
Several industry players have been looking for potentials in the domestic market, citing the low gas consumption in the country and the government?s long efforts to promote the use of gas. For instance, BP has unveiled its plan of also selling the Tangguh LNG to Java. It is considering to build a floating LNG receiving terminal in West Java to supply gas the country?s primary industrial center.
Presently, domestic natural gas consumption is about 1.5 billion cubic feet (BCF) per day, none of the amount is in the form of LNG. The government had in fact tried to optimize domestic consumption of natural gas so as to reduce oil consumption. It reasoned that Indonesia would become a net oil importer in about 10 years? time if it could not cut its domestic consumption of oil.
But, analysts say, the problem is that Indonesia still lacks a wide gas pipeline network reaching to potential buyers, including households and the industries. Unless, the national pipeline network has been developed, the domestic market?s capacity of absorbing the LNG will be limited.
In fact, the government and legislators agree on the need to develop the national pipeline network to boost the use of gas on the domestic market. This is reflected in the Oil and Gas Law of 2001, which demands the government to make a broad blueprint for investors to invest in the development of gas distribution and transmission network in the country.
The law does not set a deadline for the government to make the blueprint, but analysts say it should be completed soon so that investors could start developing the gas pipeline network in two or three years. Otherwise, Indonesia will most likely see a huge excess capacity in its LNG industry by the end of this decade and several LNG trains, which are worth billions of dollars, will be kept idle. (Robert, Alex and Godang contribute to this article)