RI may lower LNG price for Korean buyer

Fitri Wulandari, Jakarta

The Oil and Gas Upstream Regulatory Agency (BP Migas) signaled on Tuesday that Indonesia was ready to sell its liquefied natural gas (LNG) at a discounted price to maintain customer loyalty amid tougher competition in the market.

BP Migas head Rachmat Sudibyo said Indonesia might offer a discount of up to 40 percent to South Korean firm Korea Gas Corp. (Kogas), should the firm agreed to extend its contract for another 20 years.

"We shall consider it (offering the discount). The length of contract will make the price more competitive," Rachmat said on Tuesday.

He said the discount was part of a marketing strategy to win customer loyalty amid tougher competition from new LNG producers such as Australia and Qatar.

The discount is possible as higher crude prices will increase LNG prices, he said.

LNG contracts typically last for about 15 years, but buyers now prefer to cut the contract period to about five years to secure greater flexibility to adjusting to changes in the market. Furthermore, LNG contracts normally link the LNG price to the oil price, increasing or decreasing along with it.

Under the current contract, which expires in 2007, Kogas will buy LNG from the Arun LNG plant in Aceh at a rate of 2.3 million tons per annum.

BP Migas said Kogas was seeking to buy 500,000 tons to 1 million tons of LNG per year for a short-term contract of five years to seven years when the existing contract expires.

In an interview with Bloomberg, deputy head of BP Migas Kardaya Warnika said Kogas currently paid US$4.50 to $5 per million British thermal units (MMBTU) from the Arun LNG plant. Kogas is seeking to buy at a price of $3 per MMBTU.

Kogas said it might consider BP Migas' proposal when the company starts negotiations with potential suppliers in the second half of this year.

"We are looking at several possibilities, and signing a new contract with Indonesia on new terms could be an option," Oh Seung Hwan, a manager with Korea Gas' LNG purchase team said, as quoted by Bloomberg.

Korea Gas would prefer a 20-year supply contract, Oh said.

Indonesia is one of the largest LNG exporters in the world. It has two LNG plants, located respectively in Bontang, East Kalimantan, and Arun, Aceh, with a combined capacity of 31 million tons per annum.

South Korea and Taiwan are respectively the second- and third- largest LNG markets for Indonesia after Japan. LNG exports to South Korea and Taiwan account for 19 percent and 13 percent respectively of total exports of 27 million tons per annum. The bulk of LNG exports goes to Japan.