New LNG center looking for market

By Johannes Simbolon

JAKARTA (JP): State oil and gas company Pertamina and its oil and gas contractor from the United States, Atlantic Richfield Company (ARCO), are struggling to find markets for the liquefied natural gas (LNG) they will produce at Tangguh LNG center in the country's easternmost province of Irian Jaya.

Indonesia has enjoyed a strong domination in the Asia-Pacific LNG market for decades amid the rise in the region's economy and the lack of competitors.

But today, competition is getting tighter amid the economic crisis due to a weak demand in the crisis-affected customary markets like South Korea, Japan and Taiwan, plus the emergence of new LNG centers in the region and the Middle East.

With weak demand in the customary markets, all LNG producers in the region are currently looking at the emerging markets, particularly China, which has been less affected by the economic crisis sweeping the region.

"The People's Republic of China will announce very shortly that it will import three million tons of LNG by the year 2003 to 2004 (for its power plants)," president and resident manager of Atlantic Richfield Indonesia Inc. (ARII), a subsidiary of ARCO, Leon Codron told The Jakarta Post on the sidelines of the Indonesia Forum conference last month.

Indonesia, which is now the world's largest LNG exporter with an annual export of 28 million tons per year, currently accounts for 44 percent of the Asia-Pacific market for LNG which stands at 65 million tons per year.

Codron said the country's current reserves for the LNG centers in Arun, Aceh, and Bontang in East Kalimantan would account for only 20 percent of the region's annual demand by 2010, while demand was predicted to rise 100 million tons by 2010.

"With the development of Irian Jaya's Tangguh project alone, Indonesia's shares of the regional LNG market by 2010 can be 40 percent larger," Codron said.

The Tangguh LNG plant will be fed natural gas taken from production-sharing gas blocks, including the Muturi block which is operated by British Gas and Wiriagar and Berau blocks which are both operated by ARCO.

The Wiaragar and Berau blocks are owned by ARCO and partners including Nippon Oil, Kanematsu and Occidental. Muturi Block is owned by British Gas Exploration and Production and Cairns Ltd.

The blocks have been certified to have total proven and probable reserves of 18.3 trillion cubic feet of natural gas and another 3.9 trillion cubic feet of probable gas reserves. With these reserves, the Tangguh LNG project will be able to produce more than nine million tons of LNG per year.

Codron said that with such a valuable asset like the Tangguh project, ARCO, which is the largest gas producer for the domestic market from its Kangean gas field in East Java, has a grand ambition to become the main LNG producer in the region.

"We want to be a big LNG player in Asia," Codron boasted.

As part of the ambition, Codron said, ARCO acquired the U.S. giant energy company Union Texas Petroleum (UTP) in May this year. This in effect gave ARCO control over UTP's assets in Indonesia, including VICO Indonesia, one of the gas suppliers and owners of the country's largest LNG plant in Badak, Bontang.

Other co-owners of the Badak LNG plant are Huffco, Total and Unocal.

"That's a very strategic move by ARCO. Why? We consider Asia to be a very strong market for us. We bought UTP to put us in the LNG market right away. We get customers, we get experience and we get technologies," Codron said.

Competition

But the road to becoming the biggest LNG player in Asia for ARCO is not proving easy.

In marketing Tangguh's product, ARCO and Pertamina are facing competitors from the Middle East, such as Qatar and Oman, and neighboring countries like Malaysia, Brunei and Australia which cannot hide their ambition to stop Indonesia's decade-long domination in the market.

Qatar and Oman reportedly have very huge natural gas reserves that "They are ready to sell their LNG without any payment," expert staffer of Pertamina president Zuhdi Pane told the Post to describe the competitive prices offered by both countries for their LNG.

But high transportation costs make both countries less competitive than Indonesia and neighboring countries which are closer to the market, Pane said.

In terms of location, Qatar and Oman are in a stronger position to enter India, another emerging market for LNG, Pane said.

Currently, ARCO and Pertamina are facing strong competition from Australia.

Shell Australia, which is one of the owners of the country's North West Shelf LNG plant, said in The Australian's Nov. 9, 1998 edition that the Chinese government had accepted an LNG sale proposal made by the company, but they have yet to agree on the pricing scheme.

The paper said Shell along with Northern Territory Chief Minister Shane Stone and Western Australian Premier Richard Court, had aggressively approached the Chinese government and met Prime Minister Zhu Rongji over the past 12 months to market the country's LNG.

Shell is optimistic that China will buy LNG from Australia.

"My understanding is, the Australian government and Australian industry want to make LNG the number one export out of Australia. In other words, the biggest export they have, the biggest commodity, they want to be number one in LNG," Codron said.

Codron and Pertamina's director of general affairs Hadi Daryono, who handles Pertamina's marketing, said no deal had been made between China and Australia. As such, Indonesia still has a big chance to market Tangguh's product to China.

Codron noted that Tangguh had several advantage points over North West Shelf, including its proximity to the market and the high quality natural gas it produces which has a low sulfur content.

He also noted that Pertamina was "a number one marketing organization in the world on LNG. They know buyers, they know the markets and they know the system."

Moreover, Indonesia has a reputation as a reliable supplier as it has never missed a shipment since shipping its first LNG consignment in 1977. The fact that Indonesia already has two LNG centers will convince buyers like China that Indonesia will never have supply problems.

"Indonesia has two LNG centers in Bontang and Arun, we are the third. They can never miss any supply to any customer. No other country has that," Codron said.

"Australia just has North West Shelf. That's it," Codron said.

Codron acknowledged that the involvement of the Australian government in marketing the country's LNG had strengthened the country's position in the LNG market.

He therefore called on the government to help Pertamina and ARCO aggressively market Tangguh's product because the success of the Tangguh project would not only be enjoyed by ARCO but also by the government, which under contract is entitled to 60 percent of Tangguh's LNG production.

"I am a commercial person. When I go to this country, I meet commercial people. If my competitors went to see the prime minister, the president of the country, the minister of energy, I can't go. I am not a minister," Codron said.

Hadi refused to confirm if Minister of Mines and Energy Kuntoro Mangkusubroto had become part of the Tangguh's marketing team, but he said the minister had supported the Tangguh LNG project and would visit the Chinese government in the near future to promote Tangguh's product.

"The minister is very, very supportive of this project," Hadi told the Post on the sidelines of an oil and gas seminar on Tuesday.