Bali blast raises oil security doubts: China energy watch

Bali blast raises oil security doubts: China energy watch

Xu Yihe, Dow Jones, Singapore

Three weeks ago in Bali, China announced it would spend US$2 billion on acquiring Indonesian hydrocarbon reserves and making other investments in the country's energy sector.

Now, the weekend bomb blast in the same venue is ringing alarm bells at Chinese energy companies, and it has raised questions about future oil and gas investment projects in Indonesia.

Adding to their worries are concerns that oil, gas and power facilities could be the next targets for terror attack in Indonesia.

Any such attacks would definitely dampen the enthusiasm of Chinese companies seeking overseas oil and gas assets, pushing them to turn their attention to Africa or other areas, said a Beijing-based energy analyst.

"Nobody would want to expose their operations to terror attacks, which could lead to energy supply disruption and sharply higher energy prices," he said, adding that Chinese energy companies should avoid high risk areas like Indonesia despite the attraction of its energy resources.

An official with PetroChina Co., had similar views, saying that safety operation in a peaceful environment should be one of the key parameters for China in selecting overseas energy investment projects.

"We should be more cautious in acquiring Indonesia energy assets," he said.

Chinese companies feel exposed not least because they now control 12 percent of Indonesia's total crude oil production.

And their concerns have been heightened by a warning from Jakarta. "There are indications that the energy centers may possibly be targeted by terrorists," top security minister Susilo Bambang Yudhoyono said Monday.

The safety issues in Indonesia could lead Chinese oil and gas companies to turn their attention to Africa in their search for assets to help offset China's growing energy deficit, the Beijing analyst said.

This is because Africa is one of the few places with the potential hydrocarbon reserves and convenient logistics for shipping oil to China, he said.

That said, China's existing energy assets in Africa aren't in the safest of locations.

In early October, China Petroleum & Chemical Corp., or Sinopec Corp. signed an agreement with Algerian national oil company Sonatrach to invest $525 million in developing Algeria's Zarzartine oilfield.

While the stability of the government in Algeria isn't a big concern, the country has been battered by terror attacks for years.

And Sudan, where PetroChina's parent China National Petroleum Corp. owns a 40 percent stake in the Unity Field in the south, has been suffering from civil war for decades.

CNPC's Sudan field produces about 11 million tons of crude oil a year.

But China is in a difficult spot, as buying into overseas oil and gas reserves is one of the country's key energy policies.

It wants to acquire foreign assets to offset domestic energy shortfalls, to build up national petroleum reserves to ensure security of supply, and to insulate it from price spikes.

In late October, China sent a top government energy delegation to Indonesia to discuss details of China's energy assets acquisitions there.

Led by Zeng Peiyan, the minister of State Development Planning Commission, China's highest economic planning body, the delegation signed an impressive slew of agreements, committing it to more than $2 billion of investments in Indonesian energy projects in the next three years.

One of the deals is the acquisition of a 12.5% stake from BP PLC in Indonesia's Tangguh gas fields by CNOOC Ltd.

CNOOC acquired the stake for $275 million as part of its deal to buy $8.5 billion of liquefied natural gas over 25 years from the Tangguh facility. About 2.5 million tons of LNG will be shipped to China's Fujian province each year, starting in 2007.

For now though, CNOOC doesn't seem much concerned about tensions inside Indonesia.

This is despite several separatist and ethic conflicts, like those in Aceh, Northern Sumatra, where violence and lack of security forced Exxon Mobil Corp. to shut down production for five months last year.

"Indonesia is a stable place for oil and gas exploration and production, despite a few incidents," Mark Qiu, CNOOC's chief financial officer, told Dow Jones Newswires in a phone interview Tuesday.

"All our operations are offshore...under strict and strong security...it (Bali) is two-hours air flight away," he said.

He said Indonesia's government has sent military units to tighten security near its fields, and staff had been placed on alert.

Also during the Bali visit, PetroChina agreed to invest $1.7 billion to build a gas pipeline linking the islands of Java and Kalimantan.

Other Chinese commitments made in Bali include building four power plants in Sumatra and Kalimantan.

The deals followed PetroChina's April 2002 purchase for $216 million of 106 million barrels of proven oil reserves and 57 million barrels of probable crude reserves from Devon Energy in Indonesia.

That came fast on the heels of CNOOC's $585 million purchase of 360 million barrels of proven Indonesian hydrocarbon reserves from Spain's Repsol-YPF SA.