Tangguh, Posco sign LNG contract

Fitri Wulandari, Denpasar

British energy giant BP PLC signed on Thursday a contract with South Korean steel company Posco for the supply of US$2 billion worth of liquefied natural gas (LNG) to South Korea from the Tangguh LNG project, which is being built by a consortium led by BP.

Under the sales and purchase agreement, the LNG project located in Papua will supply Posco with 550,000 tons of LNG for 20 years, starting from 2005.

Posco is building an LNG terminal at Gwangyang, South Korea where the LNG will be converted into gas before being used by Posco. Posco has two gas-fired power plants, with a total generating capacity of 845 megawatts, at their steel mills in Pohang.

The contract was signed by BP Group's vice president for gas, power and renewables Anne C. Quinn and Posco's senior vice president Young Tae Kwon in Nusa Dua, Bali. Present at the signing ceremony were Minister of Energy and Mineral Resources Purnomo Yusgiantoro and head of the Oil and Gas Upstream Regulatory Body (BP Migas) Rachmat Sudibyo.

BP's senior vice president for the Tangguh LNG project Lukman Mahfoedz said the deal would make it easier for the consortium to secure financing for the project.

"The contract will help us get support from lenders (for financing) the project. The project is not only important to us, but also development in eastern Indonesia," Lukman said after the ceremony.

As the Tangguh LNG plant would not be operational before 2008, the consortium would seek supply from LNG plants in Arun, Aceh or Bontang, East Kalimantan or overseas to meet its contractual obligation to Posco.

Rachmat described the price that Posco would pay for the Tangguh LNG as "better", without mentioning the comparison.

"The price is pegged to the price of crude oil, but we get a better price (in the deal)," Rachmat said.

Aside from the deal with Posco, BP has signed a deal with China's Fujian province to supply 2.6 million tons of LNG from Tangguh for 20 years starting 2007.

The firm is also expecting to close a deal later this month with South Korea's power company SK Corp (K Power), to supply some 600,000 tons of LNG for 20 years, and with U.S. energy company Sempra Energy in August, to supply 3.7 million tons per annum to Sempra's LNG terminal in Costa Azul, Mexico.

Located in Berau-Bintuni region in Papua province, the Tangguh LNG plant is expected to produce 7 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 holds a 37.16 percent stake in the project in partnership with MI Berau BV (16.30 percent), CNOOC Ltd (16.96 percent), Nippon Oil Exploration Berau (12.23 percent), KG Companies (10.0 percent) and LNG Japan Corporation (7.35 percent).

Lukman admitted that the project had been struggling amid tougher market competition to secure enough orders to make it feasible.

"The world is now facing an oversupply of LNG. So selling the commodity is not as easy as it was when Arun and Bontang were built," Lukman said.

Indonesia, one of the world's top LNG producers, puts out a total of 30 million tons per annum from Arun and Bontang.

However, it has been facing difficulties in marketing LNG, due to an increasingly competitive market with the emergence of new players, such as Oman, Qatar and Australia.