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Jakarta Post

Politicization of gas on eve of 2014

One of the considerations of the judicial review sought against Oil and Gas Law No

Eddy Purwanto (The Jakarta Post)
Jakarta
Tue, January 29, 2013

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Politicization of gas on eve of 2014

O

ne of the considerations of the judicial review sought against Oil and Gas Law No. 22/2001 ,which led to the dissolution of the upstream oil and gas regulator (BPMigas) last November, was alleged mismanagement of oil and the gas that highly favored foreign buyers, evidenced in the large quantities of gas exported at a low price despite the gas shortage at home.

As the 2014 general elections near, practices of politicization and even criminalization are justifiable, but people have the right to obtain balanced information on what actually happened to national gas management for it to be labeled “pro-foreign” and an assumed source of state losses. One of the issues was the Tangguh (West Papua) block gas sale contract to the Chinese province of Fujian.

At least two political powers will be rocked through the politicization of the gas sale to Fujian: The first is a party once in power and seen as the culprit of the gas contract, which the later deemed as the cause for trillions of rupiah in state losses, and the second is the current ruling party regarded as having failed to improve of the sale contract. Political opponents will exploit the gas sale issue, not only within the limit of politicization, but also the tendency toward criminalization.

One of the agendas raised by President Susilo Bambang Yudhoyono during his state visit to China some time ago was to reopen the possibility of revising the Tangguh gas sale contract to Fujian. China gave its green light and the Indonesian government formed a renegotiation team. Regrettably, thus far, the team hasn’t yet been active.

In the 2000s, by the time of the development of the Tangguh LNG project, a number of new producing countries were ready to enter the global gas market such as Qatar, Oman, Nigeria, Algeria, Australia, Alaska and Sakhalin. Consequently, the gas price formula, originally more controlled by producers (sellers’ market), became more controlled by buyers (buyers’ market) through tenders to select suppliers with lowest gas prices.

Representing the government, in September 2002 BPMigas signed a Tangguh LNG sale contract with China’s oil company, CNOOC, for the delivery of gas to Fujian.

The LNG price agreed reflected the market price as related to the world oil price at the time. The price formula of Tangguh gas to Fujian was equivalent to the eight international contracts signed almost at the same time, such as those of NWS Australia with Guangdong China, Qatar Gas with Tatan Taiwan, Qalhat Oman with Mitsubishi Japan, Sakhalin Russia with Kogas Korea and several others.

Compared with the gas price on the Asia Pacific market today, the Tangguh price has unsurprisingly prompted many politicians and observers to claim that the contract was a politically unpardonable blunder of the past.

The public basically has the right to know that the flaw occurred because all domestic and foreign circles mistakenly predicted the future world oil price.

International analysts, prominent institutions such as the International Energy Agency (IEA) and even OPEC with its reliable research center forecast that the oil price until 2025 would only range US$25-35 per barrel. Nobody believed that the oil price would soar to the level of $150 per barrel.

Nonetheless, economically speaking, Tangguh wasn’t an unprofitable project. The Tangguh refinery
was built at a very low cost, about $300 per ton, compared to the planned development of the Donggi refinery in Central Sulawesi worth $1,500 per ton.

Following the 1997-1998 Asian crisis, the government was concerned with the absence of new investment of significant value.

The commitment of Britain’s BP oil company, as Tangguh’s operator, to invest a total of $6.5-$7.5 billion was expected to materialize to promote foreign investors’ confidence that Indonesia remained a worthy investment destination.

However, without buyers, the BP investment commitment would never come true.

The domestic gas market wasn’t growing at the time. For example, state electricity company PLN withdrew from negotiations to purchase Tangguh gas as the state power producer preferred oil-based fuel.

To maximize economic benefits, the government, through BPMigas, was forced to market Tangguh gas overseas. Tangguh had joined at least two international tenders, but failed because as the gas price offered was seen as higher than those of world competitors.

During the hard times, Chinese Prime Minister Zhu Rongji lent a hand by “inviting” Indonesia to supply LNG to Fujian, totaling 2.6 million tons annually for 25 years without tender, on the condition that Indonesia agreed to apply the Guangdong tender formula as related to the oil price ceiling of $25 per barrel.

Unfortunately, a diplomatic helping hand is not always accompanied by commercial gain and nobody expected that the oil price would soar to $150 per barrel, causing Indonesia to lose the potential to enjoy a higher gas price.

In fact, compared with international contracts of that time, Indonesia still enjoyed “fortune” as
in 2006, the government via BPMigas managed to persuade China to improve the gas price formula from the oil price ceiling of $25 to $38 per barrel so that the gas price approximated $4 per thousand cubic feet.

The problem continued to arise as the oil price again exceeded $100 per barrel. The government was only able to renegotiate the contract through businesses as well as through diplomatic channels.

The demand made by politicians and observers to unilaterally halt the export is not a simple option as it is contractually related to the potential for major liabilities and penalties to be borne by the contractor and
BPMigas (or its substitute).

After the success of the first renegotiation in 2006, Indonesia sought a second negotiation. In 2008, President Susilo Bambang Yudhoyono set up the Renegotiation Team headed by the coordinating economic minister. Sadly, at the same time, several vital projects experienced problems with the Chinese government, notably in connection to funding such as the 10,000 megawatts power generating project, the Merpati aircraft procurement project and others so that any “pressure” to improve the Fujian formula was considered counter-productive, even posing a burden or threat to the other projects.

As reported, along with the signing of the Fujian contract, the Chinese government offered commitments of “friendship” to Indonesia, including loans for infrastructure projects in Indonesia like a steam power generating plant, the Suramadu Bridge and other projects.

Politically, the government seems to be awaiting the right time to improve the Fujian gas price formula. No later than 2013, the team should carry out the renegotiation with China, during which the political hindrance is expected to be considerably reduced. But it should be made certain that the windfall profit will go to the government rather than the contractor.

The politicization of the gas sale to Fujian will subside when the renegotiation team is capable of pushing for a sale price hike, which is even more the case if the fruits of the effort can materialize before the 2014 elections.

The writer, an oil and gas practitioner, is a former BPMigas deputy.

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