LNG plant under siege

Indonesia's reputation as the most reliable supplier of liquefied natural gas (LNG) since 1977 and the world's largest exporter of that clean-burning fuel since the early 1990s, with total shipments of more than 30 million metric tons a year, is now being jeopardized because of the security problems besetting an LNG plant in the restive province of Aceh.

The cumulative effect of dozens of security incidents over the past year in Aceh, where rebels have been fighting for independence for decades, escalating death threats, extortion demands, random shootings and company aircraft taking ground fire, seems to have compelled ExxonMobil to shut down its onshore gas fields on March 9, thereby cutting off supplies to the Arun LNG processing plant.

The risk of losing billions of dollars worth of contracts with overseas LNG buyers is really horrifying for Indonesia especially now when it is still grappling with its worst-ever economic crisis. The temporary closure of the Arun gas fields is also conveying a grim message to investors that even the hydrocarbons industry, for so long one of the main backbones of the economy, is no longer immune to the political and economic turmoil that has beset the country since late 1997.

Moreover, the important role of the gas fields in Arun is not limited to the LNG plant that earns about $1.5 billion a year. They also feed two urea fertilizer plants nearby, one of which is the first ASEAN joint industrial project.

A still bigger loser from the stoppage of natural gas liquefaction is the country's reputation as a reliable, long-term supplier. This factor is often more important than price in LNG purchasing decisions due to the specific nature of the LNG market.

The LNG industry is highly capital intensive but its product cannot be marketed on a spot-sales basis. A natural gas liquefaction plant therefore cannot be built without the support of firm, long-term sales contracts running for at least 10 years and, sometimes, as long as 20 years. Buyers always insist on long-term contracts because the building of an LNG unloading (receiving) terminal requires a major investment, and special (cryogenic) tankers have to be ordered. A receiving terminal with an annual handling capacity of three million metric tons can cost as much as US$650 million.

The high cost of transportation makes location a key consideration in LNG-purchasing decisions, and in this case Indonesia is well positioned because Japan, Taiwan and South Korea happen to be the world's largest buyers. China and India are other potential huge buyers but they are still constructing receiving terminals. There is, thus, a very real geographical link between buyers and sellers that one cannot see in the case of crude oil.

Running afoul of its LNG buyers now is an especially horrendous prospect for the future of the Indonesian gas industry due to increasingly keen competition following capacity expansions in Australia, Malaysia, Yemen and Qatar, and the emergence of new suppliers in the Middle East.

The disruption of LNG supplies from Aceh could, therefore, affect the development of the $4 billion Tangguh gas liquefaction plant by Atlantic Richfield Co. (Arco) in Irian Jaya, another restive province with a long history of separatism. The project is scheduled to come onstream in 2004 and is designed with an annual capacity of six million tons.

No wonder, the government and Pertamina (the state oil and gas company) executives have been working all out at lobbying buyers overseas not to immediately terminate their contracts.

Needless to say, law and order should be restored to allow for the return of workers to operate the gas fields with minimum security risks. But the government's order to resume military operations in Aceh made immediately after the closure of the Arun gas fields only reinforces the Acehnese perception that the central government is solely interested in protecting the province's natural wealth, not the local people.

We hope the upcoming military operations to safeguard the Arun gas complex will not be undertaken in such a ruthless manner as to entirely kill the chance of further conciliatory approaches to Aceh. After all, we still find it hard to believe that the Free Aceh Movement members are alone responsible for the security problems. We don't think they are so stupid as to go as far as killing the goose that lays the golden egg for their future prosperity.