Letter: On Chinese LNG contract

Mon, 09/08/2008 10:52 AM | Reader's Forum

Rizal Sukma wrote in his book that Indonesian foreign policy is an extension of its domestic policy but perhaps I can now say that Indonesian trade policy is also an extension of its domestic policy.

Indonesian domestic politics looks more and more like U.S. domestic politics as the election is drawing near - blame it on the Chinese.

While the revised contact price of US$3.8 per MMBtu is very low or just half the current market price of about $8 per MMBtu, and we must seize the opportunity if the Chinese agree to renegotiate the price, all the narration and discourse over the Chinese LNG contract signed in 2002 has been blown out of proportion.

The Jakarta Post has also jumped onto the bandwagon of the blame game and even questioned the sanctity of the contract in its Sept. 1 opinion piece, which called for a review of the contract.

The quoted $20 per MMBtu price (more precisely, $20.37 per MMBtu) is West Texas Intermediate (WTI) crude oil price converted to MMBtu using a conversion factor of 5.8 MMBtu per barrel, when the oil price was about $118 per barrel last week.

Nowhere is the spot price of LNG near $20 MMBtu this year; it is just a hoax.

Last week as the fear of Gustav grew, the Henry Hub spot price was at $8.55 and the NYMEX (Mercantile Exchange) price even dropped to $7.825 per MMBtu before ending the trade at $8.394 per MMBtu while the price of LNG in North Asia is usually higher. But LNG price is on a downward trend after hitting its peak in July of this year.

At present, the market is glutted with an oversupply from Qatar, Oman and also from Algeria and even the U.S. with its growth in supply of more than 8 percent.

The present geopolitics and instability in Central Asia and Caucasus have also given China an advantage as a supply could possibly be diverted to China. In addition, China*s west-east pipeline (Xi Qi Dong Song) has also been put in place to transport the gas to its energy hungry east-coast provinces.

Moreover, if the U.S. Dollars, as settlement currency, would strengthen, commodity prices including oil and LNG would fall further too.

If we stood in China's shoes, we would possibly understand that China will not put its energy security at the whim or at the mercy of politicians and Indonesia just has to be more businesslike in all its dealings.

SIA KA MOU
Jakarta

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