Study says E.Kalimantan to Java pipeline feasible, but doubts remain

An independent consulting firm hired by state gas distribution company PGN concludes in its interim report released on Tuesday that the project to bring natural gas from gas-rich province of East Kalimantan to the island of Java was economically feasible.

However, some industry players expressed doubt about the future of the project.

PGN plans to construct more than 1,500 kilometers pipeline which will be able to supply more than 1 BCFD of gas from East Kalimantan to Java. The preliminary cost estimate for the project is US$1.7 billion. If proven feasible, PGN envisions the project to start flowing gas as early as 2008.

In the report, Pendawa Consultama Sejati predicted that gas demand in Java would increase substantially from around 1 billion cubic feet per day (BCFD) in 2003 to between 2-2.5 BCFD in 2010 and would increase further to at least 3 BCFD in 2025.

The report said that without gas supply from East Kalimantan, Java is predicted to experience shortfall by 2010, and the gap would continue to widen as indigenous gas supply would begin to decline as of 2008.

The report said that gas sent through pipeline from East Kalimantan to Java would cost cheaper than LNG shipped from Bontang or Tangguh.

According to the study, the CIF price of pipeline gas from East Kalimantan to West Java will stand at $3.03 per MMBTU, compared to the prices of $3.26 and $3.95 for Bontang and Tangguh LNG, respectively.

Only South Sumatra gas can compete with East Kalimantan gas in terms of price as the cost for the transportation of gas from South Sumatra to West Java is lower than the transportation cost for East Kalimantan gas. The CIF cost of South Sumatra gas is estimated at $2.63 per MMBTU. However, gas supply from South Sumatra will not be enough to supply the whole Java?s demand.

Aside from the East Kalimantan-Java pipeline, PGN also plans to build a gas pipeline linking South Sumatra to West Java.

The study concluded that in a view of gas demand in Java, the development of gas pipeline from East Kalimantan to Java was urgent.

However, industry players were skeptic about the feasibility of the project.

?The study shows that the transportation cost of $0.85 per MMBTU for East Kalimantan pipeline gas is based on the volume of 1.5 BCFD, which is not realistic. It would be very hard to clinch contracts to sell up to 1,5 BCFD considering that the main off-taker would be PLN, whose credit-worthiness is in doubt.

"East Kalimantan gas producers -- Unocal and Total -- are used to sell their gas to Bontang (LNG plant) at higher price and with a payment guarantee. Beside, it will be a tremendous works to raise $1.7 billion (in funds for the construction of the East Kalimantan-Java pipeline) with such uncertainty,? said one industry player.

Another player said that building LNG receiving terminal in Java could be more economical than developing gas pipeline from East Kalimantan to Java. The cost of building an LNG receiving terminal is estimated at only around $250 million.

Furthermore, he said, LNG is "more flexible" than pipeline gas in the sense that the volume of LNG's supply could be increased gradually in line with the demand.

"That?s not the case with pipeline gas. You will need a certain volume to make the project feasible,? said the player. (alex)