While global energy news headlines over the past few months have been dominated by stories on the shale gas booms in the United States and Australia, which will soon make the two countries the world’s largest gas exporters, Indonesia has again postponed the approval of the contract for the development of the East Natuna gas field in the South China Sea.
We understand that the disbandment last month of the national oil and gas regulator BPMigas by the Constitutional Court has put the government in an awkward position and heightened uncertainty in the hydrocarbon industry.
But, as BPMigas was immediately replaced by a special task force directly under the Energy and Mineral Resources Ministry, the government should have shown a sense of urgency in processing the contract, given the importance of the vast Natuna gas project in rebuilding confidence in Indonesia’s natural resources.
After all, the Natuna gas project, billed to be the largest in the region, has suffered several postponements over the past few years. Further delay could make the project, though supported by 46 trillion cubic feet of gas reserves, less attractive, because they contain a high level of carbon dioxide.
The high carbon dioxide content will make the Natuna gas production costs much higher than conventional gas, let alone compared to shale gas — natural gas produced from shale rocks and other geological formations by injecting water and chemicals into the rocks in a technique known as hydraulic fracturing.
Certainly investors will see the shale gas developments in the US and Australia, backed up as they are with updates, complete geological data, better gas distribution infrastructure and strong legal certainty, much more attractive than the East Natuna gas project.
This situation has prompted the potential contractors to ask for better terms and conditions and a contract term
that is much longer than the 30-year standard production sharing contract (PSC) in view of the long payback period
of the project.
The government should consider all the disadvantages inherent in the East Natuna gas project in assessing the incentives and terms proposed by the consortiun of contractors, which comprise state-owned oil and gas company
PT Pertamina, US-based ExxonMobil, France’s Total SA and Thailand’s PTT Exploration and Production (PTT EP).
Unlike oil, which is a global commodity sold at a global price, the international natural gas market is usually fragmented by limits on supply. Gas has to be pipelined to end-users or liquefied before it can be loaded onto ships and transported.
But with the natural gas price in the US now being squeezed to less than US$4 per million British thermal units (BTUs) — as against $15 in Japan, due to the abundant supply from the shale-gas production boom, the global liquefied natural gas (LNG) market has dramatically expanded.
The spot LNG market was virtually unknown a decade ago but is now flourishing following the development of floating storage and regasification units (FSRUs), which accept LNG deliveries from tankers and turn it back into gas before pumping it to power plants via pipelines.
FSRUs have revolutionized natural gas transportation. Previously, a gas liquefaction plant had to be backed up with a special unloading terminal, which required billion dollars of investment by the buyers.
Indonesia launched its first FSRU off Java Bay last May and is building another one to be anchored off Lampung, Sumatra.
Indonesia, with its huge potential gas reserves, is in a good position to join the natural gas trade boom but the country will miss out on this opportunity if investors are not offered internationally competitive terms and conditions by the government.