SK, POSCO to sign gas sales contract next week

Fitri Wulandari, The Jakarta Post, Jakarta

The country's oil and gas upstream authority, BP Migas, is set to sign basic agreements with South Korea's SK and Posco for the supply of liquefied natural gas (LNG) from the Tangguh LNG plant in Papua.

BP Migas is expected to sign the so-called "heads of agreement" with SK on Aug. 11 in Bali and with Posco on Aug. 14 in Seoul, Minister of Energy and Mineral Resources Purnomo Yusgiantoro said on Thursday.

A head of agreement, which is signed prior to a contract, contains principles of an agreement. The details of the agreement will be spelled out in a contract.

"The head of agreements contains principles that will be contained in the future sales and purchase agreements," Purnomo told reporters on Thursday.

SK will use the LNG for its power plant, while Posco will use it for its steel production.

On July 25, the Tangguh LNG plant won a tender to supply 1.5 million tons of LNG per annum to SK and POSCO for a period of 20 years. The contract will reportedly generate US$5 billion in revenue throughout the contract period.

The contract is expected to encourage the owner of the Tangguh project to soon develop the country's third LNG plant.

Located in Berau Bintuni Bay, Papua, the Tangguh LNG project is owned by a consortium led by Anglo-American energy giant BP PLC. The consortium has found 14.4 trillion cubic feet (TCF) of proven gas reserves in the area around the planned project.

With an additional order of 1.5 million tons of LNG per annum from the South Korean firms, Tangguh has now secured a total order of 4.1 million tons per annum. Previously, it had clinched a deal with China's Fujian province to supply 2.6 million tons per annum.

Before winning the South Korean contracts, Tangguh failed to secure contract with China's Guangdong province and with Taiwan's power firm Taipower. This raised speculations that BP could postpone the development of the project.

The development of Tangguh LNG trains is scheduled to kick off next year while the first shipment of LNG is expected to come in 2007. The BP-led consortium will build two LNG trains worth $2.2 billion with the combined capacity of seven million tons per year.

Purnomo added the government and the country's natural gas producers were now seeking to extend the existing contracts or to secure more contracts with buyers in South Korea, which is one of Indonesia's traditional buyers.

For instance, they are in talks with Kogas to extent its contract, which will expire in 2007.

"We are negotiating with Kogas, both by carrying out government to government and business to business approach," Purnomo said.

Apart from Kogas, Purnomo said, talks with South Korea's Kepco were still continuing.

Purnomo said Kepco has showed an interest in buying one million tons of LNG per year in return for the company's planned investment in the power sector. However, Purnomo said Kepco demanded that state power firm PT PLN would buy Kepco's power.

Purnomo said the government wanted to make sure that the power to be sold by Kepco was not higher than the value of gas sales to avoid making a loss.

Amid the increasingly competitive LNG market, Indonesia is still the world's largest LNG producers with a production capacity of more than 30 million tons per year.

RI's volume and value of LNG exports

Year Volume Value

(MMBTU)* (million) 1998 1,384,698 $3,047,940 1999 1,511,209 $4,207,312 2000 1,400,027 $6,753,611 2001 1,221,696 $5,268,327 2002 1,376,594 $5,664,685

* MMBTU = million British thermal unit

Source: Indonesian Financial Statistics, Bank Indonesia June 2003