Indonesian LNG spared harm from tsunami

Jan. 4, 2005
Indonesia's LNG industry, spared damage in the devastating Dec. 26 earthquake and tsunami that hit North Sumatra and Aceh, has resumed shipments to Japan and South Korea after making a deal with ExxonMobil Corp. to secure natural gas supplies for local fertilizer producers.

Eric Watkins
Senior Correspondent

LOS ANGELES, Jan. 4 -- Indonesia's LNG industry, spared damage in the devastating Dec. 26 earthquake and tsunami that hit North Sumatra and Aceh, has resumed shipments to Japan and South Korea after making a deal with ExxonMobil Corp. to secure natural gas supplies for local fertilizer producers.

Under terms of the deal, ExxonMobil will secure the coming year's natural gas supply for fertilizer firms PT Pupuk Iskandar Muda I and II (PIM-1 and PIM-2) in the province of Aceh just as Indonesia enters its planting season.

ExxonMobil Oil Indonesia, sole supplier of natural gas in Aceh, will provide 57 MMscfd of gas to PIM-1 starting immediately.

Another deal is to be signed in February or March to secure about 60 MMscfd of gas for PIM-2, according to Rachmat Sudibyo, who heads Indonesia's Oil and Gas Executive Board (BP Migas).

"The contract is a result of the government's effort to meet the gas demand in Aceh, as well as to help recover the economy devastated by the recent tragedy," said Rachmat, referring to the tsunamis.

The earthquake, measuring 9 on the Richter scale, created tsunamis that killed more than 27,000 people in Indonesia.

Despite the horrific toll in human suffering, analysts and government officials said Indonesia has been spared the economic impact of serious earthquake-related damage to the LNG facilities in Aceh.

"When the earthquake occurred on Sunday morning, there was a minor disruption of gas processing initially at PT Arun and ExxonMobil Oil Indonesia Inc.," an ExxonMobil Oil Indonesia Inc. statement said Dec. 27, quoting communications manager Deva Rachman.

"However, production was fully restored on Sunday afternoon, [and] there was no damage to the EMOI-operated facilities," the statement said.

LNG sector spared
Spared a devastating blow to its LNG industry, Indonesia will avoid deeper troubles with its export markets in the Far East with its deal with ExxonMobil.

On Dec. 24, Indonesia's state-owned Pertamina said it had decided to cut exports of LNG to Asian markets in 2005 in favor of supply to local urea fertilizer plants.

Japan had reportedly planned to buy around 16 million tonnes of LNG from Indonesia in 2005 but was expecting a cut in supplies of 1.74 million tonnes (about 11%), while cuts for South Korea and Taiwan were expected to be up to 1 million tonnes and 600,000 tonnes, respectively, for the year.

The new Indonesian government under President Susilo Bambang Yudhoyono said cuts of LNG exports to such main customers as Japan, South Korea, and Taiwan were necessary to cover a gas shortage at fertilizer plants in Aceh.

In October, the former government decided to shut down PT ASEAN Aceh Fertilizer's operations because of a shortage of gas from Arun field in Aceh, operated by ExxonMobil.

ExxonMobil also cut supplies to fertilizer firm PT Pupuk Iskandar Muda, forcing the government to import LNG to keep the plant running.

Indonesia's reduced exports
Indonesia's plans to reduce LNG exports, however, was a move that could have caused more problems for Jakarta than for its overseas markets.

The Arun LNG plant in Aceh has a contract to supply 76 tankers of LNG in 2005 to buyers in Japan and South Korea.

But supplying gas to a local urea fertilizer factory would mean reducing LNG exports by 6 tankers valued at $132 million/year, a Pertamina official said.

BP Migas said if contract buyers abroad did not agree with the rescheduling plan, Indonesia would have to import 9 tankers of LNG from the spot market.

Indonesia's announcement created concern in the Japanese government.

LNG accounts for around 14% of Japan's primary energy supply, with imports coming to about 58.47 million tonnes in the year ending in March 2004. Indonesia is the biggest supplier, providing roughly a third of Japan's LNG imports.

"Japan is extremely nervous about securing a stable energy supply because of higher crude oil [prices]," said Japan's Minister of Economy, Trade, and Industry Shoichi Nakagawa.

But Japanese purchasers were less nervous than Nakagawa, largely due to changes in supply that have taken place over much of the past 20 years. Indonesian LNG accounted for 53% of Japan's total imports in fiscal 1985, but the figure fell to 30% by fiscal 2003.

On learning of Indonesia's planned cuts in early December, Osaka Gas Co. said it would seek supplies elsewhere.

"We plan to make up for the reduced supply by increasing purchases from other sources and through short-term deals," said a company spokesperson, explaining that the firm also had been buying from Malaysia, Brunei, Australia, and Qatar.

Osaka, a major company serving western Japan, bought 3.12 million tonnes of LNG in the year to March 2004—nearly half of it from Indonesia.

Other Japanese buyers are adopting the same strategy of diversification. Many already buy LNG from Oman and Russia's Sakhalin II project, on the understanding that supplies of will become tighter as demand from China and India grows.

Tokyo Electric Power Co., which is responsible for 30% of Japan's overall annual LNG purchasing, or 16 million tonnes, planned to reduce its 2005 Indonesian purchases to 130,000 tonnes from 510,000 tonnes even without Jakarta's export cut.

Tokyo Electric also decided to buy 2 million tonnes/year from a natural gas field near Darwin, Australia, once it starts producing in 2006, as well as 1.5 million tonnes/year from the Sakhalin II project, when it commences production in 2007.

Tohoku Electric Power Co. has drawn up plans to reduce its imports from Indonesia by 2.1 million tonnes/year to 800,000 tonnes/year from 2005, while Tokyo Gas Co. and Toho Gas Co. have decided to import LNG from the Sakhalin II project once it begins operating.

Timely rescue
For the Indonesian LNG industry, as well as local fertilizer makers, the government's deal with ExxonMobil looks like a timely rescue—especially for a country eager to export increased reserves.

Indonesia's gas reserves have increased to an estimated 180.5 tscf in 2004 from 178.113 tscf in 2003 and 137.8 tscf in 1997.

Energy and Mineral Resources Minister Purnomo Yusgiantoro attributed the increase to growing oil and gas investment.

Investment in the oil and gas industry rose from $4.77 billion in 1997 to $5.31 billion in 2003, Purnomo said. However, in the first half of 2004 investment in the oil and gas sector was only $1.29 billion.