Indonesia riles LNG buyers with supply disruption

Eric Watkins
Senior Correspondent

LOS ANGELES, Jan. 26 -- Indonesia's reputation as a reliable supplier of liquefied natural gas has come into question once again due to a new disruption of supply, even as the Southeast Asian nation seeks to ramp up production.

Indonesia's state-run PT Pertamina announced on Jan. 18 that it had decided to delay the shipment of 51 cargoes of LNG to buyers in Japan, South Korea, and Taiwan—the country's three largest LNG customers—this year.

The delay, which Pertamina blamed on a combination of a slight decline in gas output and a sudden need to reallocate the commodity to fertilizer producers, will cut export commitments from its Bontang plant in East Kalimantan to 335 shipments and 45 from its other plant at Arun in Aceh.

Ari Soemarno, senior vice-president, marketing and trading, shrugged off the delay, saying that the buyers were seeking fewer LNG shipments this year.

"Everything has been agreed upon in principal, and we just need to sign the agreements," Ari said in a press conference announcing the delays.

Buyer responds
But Japanese importers of LNG were not happy with the delays.

Indeed, Indonesia's move to delay the shipments would send a bad signal to investors and hurt the country's business competitiveness, a Japanese company affected by the decision warned.

Yasuo Ryoki, acting head of energy resources at Osaka Gas, said Indonesia's decision to the export shipments undermined the importance of the company's securing a supply commitment, which had been agreed to under a legitimate contract.

Speaking after delivering a speech at a gas conference in Jakarta on Jan. 19, Ryoki said supply sustainability was the most crucial factor for companies before they draw up a business plan, even more important than "for example, price competitiveness".

Still, Ryoki was quoted as seeking a better deal for Osaka due to the cutback in shipments. "Indonesia should offer LNG prices close to the price formula for Fujian," Bisnis Indonesia quoted Ryoki as saying.

"Our demand must be responded to, because we could also look at other producers," Ryoki threatened.

During his presentation, Ryoki also said Indonesia needed to improve the management of its gas industry, explaining that currently, it was unclear whether Pertamina or the Oil and Gas Implementing Body (BP Migas) had authority to deal with gas buyers.

"Indonesia needs to have a single entity to accommodate buyers' demand," he said. Most buyers didn't know to whom they could address problems, he said. While affirming that Osaka Gas remained willing to keep its operation in Indonesia, Ryoki asked for better management practices.

Despite having officially accepted the delay, the company, Ryoki said, did not want to see a repeat in the future. Osaka Gas, a long-term contract buyer of LNG from Indonesia, imports 6.4 million tonnes/year of LNG, including 1.7 million tonnes/year from Indonesia. Its contract with Indonesia will end in 2010.

Aside from Osaka Gas, other affected companies include Kansai Electric Power Co., Chubu Electric Power Co., Tokyo Gas Co., and Korea Gas Corp.

Indonesia's Koran Tempo daily newspaper reported that Indonesia exported 16.3 million tonnes of LNG to Japan in 2004, roughly 30% of Japan's LNG imports; 5.3 million tonnes to South Korea, 26% of its imports; and 4 million tonnes to Taiwan, 63% its imports.

Import for export
But Indonesia itself had to import much of that natural gas for onward sale to its customers in the Far East.

In June 2004, Indonesia was expected buy up to 30 LNG cargoes on the spot market in order to meet its contractual obligations because of disruptions to its domestic gas output.

Domestic unrest in the Aceh region had led to lower natural gas deliveries and output at the Arun LNG plant, while a fire at Unocal Corp.'s Attaka offshore gas field reduced deliveries to the Bontang plant in East Kalimantan during February.

Wood Mackenzie, Edinburgh, expected Pertamina to purchase as much as 1.5 million tonnes of LNG last year to cover existing gas contract shortfalls.

"Traditionally, Indonesia has been a key exporter of LNG, but in the last 2-3 years its position has fallen, firstly in meeting contractual supplies and secondly in its overall standing in the LNG market," said Wood Mackenzie's Gavin Law.

Tangguh delay
Meanwhile, construction of the Tangguh LNG plant in Papua may be further delayed, pending an agreement for the inclusion of the "government act" clause in the contract.

Ministry of Energy and Mineral Resources Director General of Oil and Gas Iin Arifin Takhyan told reporters recently that BP PLC, which leads the project consortium, would not sign the deal without a guarantee from the government.

The clause will stipulate that should there be a change of the administration's policies that causes the plant to be unable to fulfill its commitments, the government will pay the resulting penalties.

"If we don't give [the guarantee], they won't sign the contract," said Iin. The inclusion of such a clause in the principal of agreement (POA) would be uncommon, he said. "However, we have to create an attractive climate for them [investors]."

BP Indonesia Executive Vice-Pres. Gerald Peereboom told the Jakarta Post that government approvals were at this point the most critical elements for the project.

Indonesia relies heavily on Tangguh, its third LNG plant, to make up for declining production at its plants in Bontang and Arun, both of which have been operating for more than 20 years.

The Tangguh project will use gas from offshore fields with total reserves estimated at 14.4 tcf.

BP and partners will operate the fields under production sharing contracts from Pertamina: BP with 37.16%, MI Berau (Mitsubishi and Inpex) 16.3%, CNOOC Ltd. 16.96%, Nippon Oil 12.23%, KG Cos. (Kanematsu Corp., Japan National Oil Co., and Overseas Petroleum Corp.) 10%, and LNG Japan (Nisshi Iwai Corp. and Sumitomo Corp.) 7.35%.

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