New LNG center looking for market

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.