Indonesia's LNG Born to empower the world

Indonesia has used synthetic gas derived from coal since 1964. This synthetic gas was later added with other oil derivatives.

For quite some time the synthetic gas industry was developing at a slow speed and only in the past few years has the state- owned company Perusahaan Gas Negara (PGN) started to make use of natural gas. The domestic consumption of natural gas has been increasing dramatically ever since.

In the 1960s the domestic price of natural gas was very low. During that period it was used to boost the farming sector, which was the country's main target of development in achieving the country's self-sufficiency program for rice.

The discovery of huge quantities of natural gas then led to the increase of fertilizer production.

The role of the country's natural gas in the economy experienced an unprecedented increase when in the early 1970s natural gas fields were discovered in Arun (Aceh) and Badak (East Kalimantan).

This discovery coincided with the increasing domestic, as well as worldwide, demands. It was in this decade that exploration and exploitation of the country's natural gas was intensively conducted.

Previously the state-owned oil and gas company, Pertamina, had not developed any further the large reserves of gas that it discovered for basic supply and demand reasons, as natural gas was not a viable commodity at the time or at least one that could bring in large profits.

That is why gas producing wells were often buried again and only in the 1970s did natural gas become an important commodity that was widely used.

Some of the significant events that spurred on the growing use of natural gas in the 1970s included:

* The oil crisis in 1973 that ended the availability of abundant and inexpensive oil.

* The emergence of environmental awareness in the use of environmentally friendly energy.

* Technology advancement for the processing of natural gas into liquefied natural gas (LNG) along with relevant transportation advancements as well as regasification technology and other related sophisticated developments.

The discovery of major natural gas reserves in Arun on Oct. 24, 1971 by Mobil Oil in Indonesia and in Badak on Feb. 11, 1972 by Huffco in Indonesia (now called VICO) marked the beginning of Indonesia's export orientation for this product.

The soaring needs of natural gas by various industries in Japan boosted the production and exports of Indonesia's LNG as the first shipment took place in 1977.

The first export contract was initially signed on Dec. 20, 1973 by Japanese Western Buyers a consortium consisting of five buyers: Chubu Electric, Kansai Electric, Nippon Steel, Osaka Gas and Kyushu Electric for eight trillion btu of LNG for 20 years. This contract - widely known as the "1973 Contract" - is, to date, the largest LNG sales contract in the world.

The first LNG shipment of 125 thousand cubic meters or approximately 56 thousand metric tons was carried out three years later, on Aug. 20, 1977, from the LNG terminal in Bontang to its purchaser's terminal in Japan.

LNG exports from Arun were shipped in 1978 under the same 1973 contract.

Since then Indonesia's LNG business has seen major developments.

The first contract with South Korea (KOGas) for 2.3 million tons per year for a period of 20 years was signed in 1983. Then in the middle of 1990 another contract for 1.4 tons annually was signed.

In 1987 the first LNG sales contract for Taiwan was signed by Chinese Petroleum Corporation (CPC).

Today Indonesia is the largest LNG exporter in the world. In 2001 its export volume reached 23.9 million tons and the buyers are Asia's three major industrial countries: Japan, South Korea and Taiwan.

Indonesia's LNG is currently produced by two refineries: PT Arun NGL Co. in Naggroe Aceh Darussalam and PT Badak NGL Co. in East Kalimantan. Each is supplied by the gas producers - often called the production sharing contractors - Mobil Indonesia for PT Arun while for PT Badak the suppliers are Total Indonesie, Vico Indonesia and Unocal Indonesia.

For exports in the future, besides focusing on the current "traditional" markets of Japan, South Korea and Taiwan, Indonesia plans to open up new potential markets, such as Thailand, India and China.

For the first decade of this century the requirement of LNG of those three nations is estimated at between 11 and 16 tons per year and is expected to increase to between 24 and 36 tons in the next decade.

Like other LNG projects, Indonesia's LNG projects have unique characteristics in comparison to other commodities as they involve huge investments, major risks, long term realization and LNG chains.

With these factors in mind, LNG sales contracts are usually preceded by base load contracts with long term commitments and the "take or pay" clause. Therefore the purchasing country's demands are pre-calculated prior to the signing of the contract.

However, in its implementation the requirements can vary in reality, both in the reduced or additional shipments as far as such are allowed in the contract, which also includes spot purchases.

Indonesia's rapid LNG business, as described by Pertamina's former president director, Baharudin - often referred to as "Mr LNG" - in his book Prospects of Indonesia's LNG during the Second Development Program published by the company, basically covers three phases of development.

The first phase was from the country's independence until the 1970s. During this period it was directed to fulfill the limited domestic requirement, such as the raw material for fertilizer plants, state-owned electricity company (PLN) and the state-owned gas company, PGN.

With the robust increase in domestic demands, policies were made on the diversification of its usage and the annual gas production was not entirely converted into LNG for export. During this stage a long term LNG sales contract covering 20 years was signed with the Japanese purchasers in 1973 and again in 1981.

The second phase started in 1986 with the development of natural gas was directed towards producing an alternative fuel called Compressed Natural Gas, or CNG.

The third phase was in the mid 1990s with the extension of existing contracts, the 1973 and 1981 contracts.

Most of the world's LNG is produced in Asia, Africa and the Middle East. Asia's suppliers of LNG, including Indonesia, are currently focusing their marketing on Japan, South Korea and Taiwan as the existing major markets. They are trying to further expand to other markets, such as Thailand, China and India.

Starting in 1998 new LNG projects have been developed in Abu Dhabi, Indonesia and Malaysia with a total capacity of 1.2 trillion cubic feet. Qatar and Nigeria built two LNG projects in 2000 that would produce one trillion cubic feet annually. Qatar planned to produce 195 million cubic feet, which would be entirely exported to Japan.

Today's production and transportation capacity well exceeds the demands of the "traditional" markets (Japan, South Korea and Taiwan) until the year 2010.

However, in 2010 the demand for LNG is estimated to increase and will be far above the supply. South Korea and Taiwan will be potential markets as long as nuclear power is not developed as a substitute energy source in these two countries.

-- Warta Pertamina