LNG deal with China

The development of 14.4 trillion cubic feet of proven natural gas reserves near Bintuni Bay on the northwestern part of Papua was secured after state oil company Pertamina signed in Jakarta last week a firm 25-year contract to supply China National Offshore Oil Corporation (CNOOC) with 2.6 million metric tons of liquefied natural gas (LNG) a year starting in 2007.

The S$8.5 billion deal capped more than two years of high- powered political lobbying, including by President Megawati Soekarnoputri herself who visited China in April, and concerted marketing efforts by British oil giant BP Plc and Pertamina.

The contract is really a confidence-building feat after an initial disappointment of losing to Australia LNG Pty. Ltd in a previous bid for LNG supply, also to CNOOC but for China's southern province of Guangdong, in August.

Getting a buyer is the key to the development of a natural gas liquefaction complex because, different from crude oil, natural gas cannot be stored. Once it is produced it must immediately be delivered to buyers. Neither does LNG have a spot market.

No wonder negotiations always involve complex calculations of financing package and long-term pricing formula, followed by huge construction works for the liquefaction plant itself and its loading terminal by the supplier and unloading (receiving) terminal by the buyer and orders for special cryogenic tankers to transport the fuel.

CNOOC's commitment to tie up its huge LNG terminal in eastern China province of Fujian to the $2 billion Tangguh LNG project in Bintuni was apparently prompted by Indonesia's proven track record not only as the world's largest LNG supplier with an annual capacity of more than 30 million tons.

Since 1997, the country has been well known as the most reliable exporter of the clean-burning fuel as proven by the impeccable safety records of its LNG complexes at Arun in the northern part of Sumatra and Bontang in East Kalimantan. Security problems did disrupt production at the Arun plant between March and July last year, but Pertamina succeeded in meeting delivery schedules to Japanese and Korean buyers with shipments from the Bontang plant.

The Fujian contract alone is not adequate to provide economies of scale to the Tangguh LNG project, initially designed with two trains with total production capacity of seven million tons a year. But as with the development of a completely new airplane, the deal can serve as the launch order for the LNG project.

Getting other buyers will not likely be so difficult once the project comes on stream because Asia's demand for LNG, which has increasingly become a more important source of energy in the region, is projected to more than double to 100 million tons a year by 2010. In addition to China, demands in energy-hungry Japan, South Korea and Taiwan have steadily been expanding. The Philippines, Thailand and India are other potential big buyers as well.

The Tangguh project will certainly accelerate the development of Papua, becoming a growth center for the least-developed province, and will bring in huge additional incomes as 70 percent of the revenue from the project will go to the central government and 30 percent will directly stream into the local administration's coffers.

Most important, though, is the multiplier effect of such a huge project in the remote area as it will also require the building of various basic infrastructure. The BP Plc consortium, which will construct and operate the facility, has estimated that at least 3,000 workers will be needed during the construction phase, and 1,000 will be permanently employed in the plant's operations.

Yet more encouraging is the BP Plc's awareness that it must from the outset fully embrace corporate social responsibility. The British oil giant seems seriously committed to avoiding the fatal mistakes of other major oil mining firms during the authoritarian Soeharto era when the interests of local stakeholders and the environment were often sacrificed for the sake of high efficiency and high profits.

BP Plc's hiring of scores of anthropologists, sociologists and environmental consultants to work in Bintuni and its surrounding areas long before the project construction starts is the first, right step to realize its full commitment to preserving the environment and social harmony with local tribes.

A high standard of corporate social responsibility requires BP Plc to be fully environmentally friendly so as not to damage the local biodiversity and mangrove forests. Such responsibility also obliges BP Plc to hire as many locals as possible and to procure as much as possible its daily needs and those of its employees from local suppliers. Simply put, BP Plc cannot operate as an affluent enclave in the area.

Professing high social responsibility is not an easy job and could even appear to be grossly inefficient, especially in such an underdeveloped province as Papua, because that requires BP Plc to invest a great deal in personnel training, education and in the development of local entrepreneurship.

However, social harmony and full rapport with the local people will be the best security for BP's long-term operations in Papua.