Political risk shadows Asian LNG projects<\/p>\n
SINGAPORE (Dow Jones): After a four-month closure following
\nseparatist rebel attacks, liquefied natural gas is once again
\nflowing from the Arun LNG plant in Indonesia's breakaway Aceh
\nprovince.<\/p>\n
The experience hasn't been a happy one for plant operator
\nExxon Mobil Corp. and its harassed staff. While no staff have yet
\nbeen badly injured, the company hasn't only lost money, but is
\nfacing legal action in the U.S. from the International Labor
\nRights Fund, which accuses Exxon Mobil of complicity in Acehnese
\nhuman rights violations.<\/p>\n
The events at Arun have drawn attention to the political risk
\ninvolved with major oil and particularly LNG investments in the
\nregion. Although higher oil prices and environmental factors are
\nencouraging both demand and investment in Asia's LNG sector, and
\ntechnology is bringing down costs, the fates of many plans hinge
\non political, rather than commercial, factors.<\/p>\n
Aside from Arun, the struggle between separatists in
\nIndonesia's West Papuan province and Jakarta is casting a shadow
\nover BP PLC's proposed multibillion dollar Tangguh LNG project.<\/p>\n
Meanwhile, uncertainty over tax and contract issues in the
\nwake of Indonesia and Australia's illegal division of East
\nTimorese waters, has led Phillips Petroleum Co. to postpone the
\nfirst phase of its Bayu Undan gas plans, although Royal
\nDutch\/Shell Group now appears to be proposing alternative
\ndevelopment plans.<\/p>\n
In Russia too, political and legal uncertainties, including
\ntension between provincial and central governments, poses a risk
\nto projects, including the Shell-led Sakhalin II LNG project in
\nRussia's far east. The giant project was officially launched in
\nJuly, but no federal ministers attended, despite invitations.<\/p>\n
Some observers even claim there are secessionist risks
\nassociated with the established Bintulu LNG plant, located in
\nMalaysia's eastern state of Sarawak, in which Shell has a stake.<\/p>\n
Big oil companies still have the appetite and cash to tackle
\nthese projects, but risk must be offset by higher potential
\nreturns.<\/p>\n
Given the uncertainty in Indonesia, the rapid development of
\nBP's Tangguh project in West Papua looks increasingly risky.<\/p>\n
One Singapore-based analyst said potential buyers, notably the
\nChinese, view current tensions as a threat to security of supply
\nfrom the plant. China expects to award a tender for its first LNG
\nsupply by the end of this year, and BP - well positioned through
\nits stake in China's first LNG import terminal - is a leading
\ncontender.<\/p>\n
However, the analyst conceded that Tangguh's isolation could
\nwork in BP's favor. And BP itself shows no sign of backtracking.
\nGas reserves are enormous and easily accessible, and BP hopes
\ndevelopment will be approved next year. BP initially aims to
\nbuild a two-train LNG project at a cost of about US$2 billion by
\nlate 2005.<\/p>\n
BP only recently lifted its Tangguh stake to 50 percent
\nthrough the acquisition of Cairns Ltd., a unit of Malaysia's
\nGenting Bhd., which held a 9.7 percent stake in Tangguh.<\/p>\n
Japanese companies appear eager to lift their stakes too. In
\nJune, Mitsubishi Corp. bought Occidental Petroleum Corp.'s
\nTangguh interests for US$480 million - bringing Mitsubishi's
\noverall stake to 16.3 percent. And Sumitomo Corp. recently formed
\nan LNG joint venture with Nissho Iwai Corp., and aims to expand
\nthe joint venture's 1.1 percent stake in Tangguh.<\/p>\n
Further south in the Timor Sea, it is clear Phillips and its
\nmain partners, Shell and Woodside Petroleum Ltd., would have been
\nfar happier to establish the Bayu Undan gas project under
\nAustralian, rather than East Timorese jurisdiction.<\/p>\n
Phillips says the indefinite delay of its Bayu Undan plans is
\ndue to East Timor's 41 percent tax rate.<\/p>\n
But, probably more important is the risk that East Timor could
\nchange Phillips' underlying production contracts, which were
\nawarded under joint Indonesian and Australian sovereignty - which
\nwas never recognized under international law.<\/p>\n
At the same time, Phillips' claim to the gas field is being
\nchallenged by U.S.-based upstream company Petro Timor, which was
\nlegally awarded exploration rights before Indonesia's invasion of
\nEast Timor in 1975.<\/p>\n
In July the Sakhalin II consortium initiated an $8.9 billion
\nplan to build by 2006 what would be Russia's first offshore
\nforeign-owned project, and one of the world's largest grassroots
\nLNG plants.<\/p>\n
However, financing has still to be raised, and major contracts
\nwon't awarded until June 2002. The consortium - in which Shell
\nowns 55 percent, Mitsui & Co. 25 percent and Mitsubishi Corp. 20
\npercent - plans to start building the 9.6 million-metric-ton
\nplant in 2002.<\/p>\n
Shell's Russian head says Russian authorities must "find the
\npolitical will" to overcome logistical and administrative
\nobstacles for the plan to be successful.<\/p>\n
Apart from tension between regional and federal governments,
\nthese obstacles include questions over production sharing terms,
\nand frustration on the part of Russian oil and gas giants such as
\nGazprom, over their complete absence from the project.<\/p>\n
Sakhalin II's biggest advantage is its proximity to Japanese
\nand South Korean markets, which, combined with its scale, gives
\nit a big cost advantage over lower risk rivals such as
\nAustralia's Northwest Shelf plant. The three Sakhalin partners,
\nwhich are also equity holders in the NWS plant, appear prepared
\nto take a chance on Sakhalin, which could slash the price of
\nJapanese LNG deliveries.<\/p>",
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