Tangguh construction snagged over govt guarantee

Tangguh construction snagged over govt guarantee

Leony Aurora, The Jakarta Post, Jakarta

The construction of the Tangguh liquefied natural gas (LNG) plant
in Papua may be further delayed, pending an agreement for the
inclusion of the "government act" clause in the contract.

Ministry of Energy and Mineral Resources's director general of
oil and gas Iin Arifin Takhyan told reporters recently that
British energy giant BP Plc, which leads the project's
consortium, would not sign the deal without a guarantee from the
government.

The clause will stipulate that should there be a change of the
administration's policies that causes the plant to be unable to
fulfill its commitments, the government will pay the resulting
penalties.

"If we don't give (the guarantee), they won't sign the
contract," said Iin. "We're looking for a compromise. The
authority is not in our hands anymore, but in the Ministry of
Finance's."

The inclusion of such a clause in the Principal of Agreement
(PoA) would be quite uncommon, he said. "However, we have to
create an attractive climate for them (investors)."

Indonesia has placed a lot of hope in Tangguh, its third LNG
plant, to make up for the declining production in its other
plants in Bontang, East Kalimantan, and Arun, Aceh. Both plants
have been operating for more than 20 years and Tangguh is much
larger.

Located in Berau-Bintuni region in Papua province, the Tangguh
plant is expected to produce seven million tons per annum in the
first phase of production. Gas fields, which will feed the plant,
have certified reserves of 14.4 trillion cubic feet (TCF).

BP Indonesia executive vice president Gerald Peereboom said
that government's approvals were at this point the most critical
elements for the project.

"Everything must wait on that. Each day we delay the approval
is a day delayed in the project," he said.

"That's detrimental to the partnership and detrimental to the
government of Indonesia."

The government has previously said that Tangguh's construction
would start in January. The LNG plant's production has been
rescheduled to open in 2008 from the earlier plan of 2007.

Peereboom said the consortium -- comprised of MI Berau BV,
CNOOC Ltd, Nippon Oil Exploration Berau, KG Companies and LNG
Japan Corporation -- were ready to finance the first phase of
construction, which would start as soon as the approvals were
given.

The project is estimated to cost US$5 billion, of which BP and
partners will cover $2 billion with the remaining $3 billion
expected to come from lenders. Last year, Halliburton Co.'s
Kellog Brown & Root unit was named as the contractor to build
Tangguh.

To meet export commitments while the plant was under
construction, BP would seek supply from its network as well as
other gas producers and the spot market, said Peereboom.

"That's not a big problem," he said.

BP has so far secured deals to supply a combined 7.6 million
tons of LNG worldwide, including to San Diego-based Sempra
Energy, South Korea's K-Power Co. and steel maker Posco, as well
as a plant in China's Fujian province. The commitment for South
Korea is the first to be fulfilled, starting in 2005.