LNG plant under siege

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.