Political risk shadows Asian LNG projects

Political risk shadows Asian LNG projects

SINGAPORE (Dow Jones): After a four-month closure following
separatist rebel attacks, liquefied natural gas is once again
flowing from the Arun LNG plant in Indonesia's breakaway Aceh
province.

The experience hasn't been a happy one for plant operator
Exxon Mobil Corp. and its harassed staff. While no staff have yet
been badly injured, the company hasn't only lost money, but is
facing legal action in the U.S. from the International Labor
Rights Fund, which accuses Exxon Mobil of complicity in Acehnese
human rights violations.

The events at Arun have drawn attention to the political risk
involved with major oil and particularly LNG investments in the
region. Although higher oil prices and environmental factors are
encouraging both demand and investment in Asia's LNG sector, and
technology is bringing down costs, the fates of many plans hinge
on political, rather than commercial, factors.

Aside from Arun, the struggle between separatists in
Indonesia's West Papuan province and Jakarta is casting a shadow
over BP PLC's proposed multibillion dollar Tangguh LNG project.

Meanwhile, uncertainty over tax and contract issues in the
wake of Indonesia and Australia's illegal division of East
Timorese waters, has led Phillips Petroleum Co. to postpone the
first phase of its Bayu Undan gas plans, although Royal
Dutch/Shell Group now appears to be proposing alternative
development plans.

In Russia too, political and legal uncertainties, including
tension between provincial and central governments, poses a risk
to projects, including the Shell-led Sakhalin II LNG project in
Russia's far east. The giant project was officially launched in
July, but no federal ministers attended, despite invitations.

Some observers even claim there are secessionist risks
associated with the established Bintulu LNG plant, located in
Malaysia's eastern state of Sarawak, in which Shell has a stake.

Big oil companies still have the appetite and cash to tackle
these projects, but risk must be offset by higher potential
returns.

Given the uncertainty in Indonesia, the rapid development of
BP's Tangguh project in West Papua looks increasingly risky.

One Singapore-based analyst said potential buyers, notably the
Chinese, view current tensions as a threat to security of supply
from the plant. China expects to award a tender for its first LNG
supply by the end of this year, and BP - well positioned through
its stake in China's first LNG import terminal - is a leading
contender.

However, the analyst conceded that Tangguh's isolation could
work in BP's favor. And BP itself shows no sign of backtracking.
Gas reserves are enormous and easily accessible, and BP hopes
development will be approved next year. BP initially aims to
build a two-train LNG project at a cost of about US$2 billion by
late 2005.

BP only recently lifted its Tangguh stake to 50 percent
through the acquisition of Cairns Ltd., a unit of Malaysia's
Genting Bhd., which held a 9.7 percent stake in Tangguh.

Japanese companies appear eager to lift their stakes too. In
June, Mitsubishi Corp. bought Occidental Petroleum Corp.'s
Tangguh interests for US$480 million - bringing Mitsubishi's
overall stake to 16.3 percent. And Sumitomo Corp. recently formed
an LNG joint venture with Nissho Iwai Corp., and aims to expand
the joint venture's 1.1 percent stake in Tangguh.

Further south in the Timor Sea, it is clear Phillips and its
main partners, Shell and Woodside Petroleum Ltd., would have been
far happier to establish the Bayu Undan gas project under
Australian, rather than East Timorese jurisdiction.

Phillips says the indefinite delay of its Bayu Undan plans is
due to East Timor's 41 percent tax rate.

But, probably more important is the risk that East Timor could
change Phillips' underlying production contracts, which were
awarded under joint Indonesian and Australian sovereignty - which
was never recognized under international law.

At the same time, Phillips' claim to the gas field is being
challenged by U.S.-based upstream company Petro Timor, which was
legally awarded exploration rights before Indonesia's invasion of
East Timor in 1975.

In July the Sakhalin II consortium initiated an $8.9 billion
plan to build by 2006 what would be Russia's first offshore
foreign-owned project, and one of the world's largest grassroots
LNG plants.

However, financing has still to be raised, and major contracts
won't awarded until June 2002. The consortium - in which Shell
owns 55 percent, Mitsui & Co. 25 percent and Mitsubishi Corp. 20
percent - plans to start building the 9.6 million-metric-ton
plant in 2002.

Shell's Russian head says Russian authorities must "find the
political will" to overcome logistical and administrative
obstacles for the plan to be successful.

Apart from tension between regional and federal governments,
these obstacles include questions over production sharing terms,
and frustration on the part of Russian oil and gas giants such as
Gazprom, over their complete absence from the project.

Sakhalin II's biggest advantage is its proximity to Japanese
and South Korean markets, which, combined with its scale, gives
it a big cost advantage over lower risk rivals such as
Australia's Northwest Shelf plant. The three Sakhalin partners,
which are also equity holders in the NWS plant, appear prepared
to take a chance on Sakhalin, which could slash the price of
Japanese LNG deliveries.