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.