Maximizing income from gas

Thu, 06/25/2009 11:10 AM  |  Opinion

We support the government's tough stance to secure maximum benefits from the Senoro and Matindok natural gas fields in Central Sulawesi. But a too hardball approach that does not take into account the prevailing weak market conditions could jeopardize the economic viability of the development of the whole gas field, including the natural gas liquefaction plant project that would have an annual capacity of two million tons.

Vice President Jusuf Kalla's recent policy statement that all gas from the two fields must be sold to domestic industrial users amounts to an abrupt enforcement of a compulsory domestic market obligation. This policy certainly could cause new uncertainty and discourage new investors from developing our hydrocarbon resources.

Energy, like food, is indeed a vital commodity, and energy independence is therefore quite strategic for the economy. Hence, the government's policy of giving top priority to domestic industrial users makes sense.

However, fully enforcing the domestic market obligation without adequate preparations for the development of domestic liquefied natural gas (LNG) market infrastructure or the establishment of a fair pricing mechanism for domestic buyers would be counterproductive.

The development of LNG requires huge investments for transport (using special tankers) and loading and unloading terminals. An LNG plant therefore needs a long-term contract of at least 15 years between suppliers and buyers to provide certainty for investors and creditors because spot LNG market has not developed yet.

Forcing the Pertamina, Medco and Mitsubishi consortium to sell their gas exclusively to domestic users at a fixed price far below the international benchmark, would render the development of the gas fields, which needs US$1.4 billion investment, commercially unfeasible.

Not a single creditor will be wiling to finance the further development of the two gas fields, let alone the LNG plant.

We have learnt that both Pertamina and Medco, which own the two gas fields and have a 49 percent stake in the LNG plant project, have agreed to sell a portion of their gas to domestic petrochemical companies at half the price they will charge to Japan's Chubu and Kansai power companies.

This, we think, could be a win-win solution to the protracted negotiations for the LNG project. It is of the utmost importance that the sales contract stipulates a clause that pegs the gas price to international oil prices.

We cannot afford to take an excessively tough, nationalistic negotiating position now, as the world LNG supply capacity is projected to expand by 30 percent next year, while demand is foreseen to fall by 10 percent due to the economic slump.

Hopefully, Kalla's recent policy statement is only an outburst of nationalist sentiment, which runs unusually high during the presidential election campaign period.

We are confident that common sense will ultimately prevail after the hurly burly of the presidential election ends, so that the $1.6 billion Donggi Senoro LNG plant project, which is 51 percent owned by Mitsubihsi, will proceed smoothly to serve our Japanese customers, who, since 1977, have taken up more than 70 percent of our LNG sales.

Yet what is most welcome is that the development of the Senoro and Matindok gas fields, according to state-owned Pertamina, will generate $600 million in annual income for the government for 15 years starting in 2012.

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