Tapping Natuna gas

Tapping Natuna gas

Fourteen years after Esso Natuna Inc., the Indonesian subsidiary of Exxon Corp., obtained a production-sharing contract from Pertamina for the development of the Natuna D-Alpha block, the American contractor is about to develop what will be its biggest natural gas bonanza in the world. Some loose ends have yet to be tied up, despite the conclusion of a memorandum of understanding with the state oil company on Wednesday, before a final agreement is concluded in January. But the signing of the preliminary deal, which was witnessed by one American and eleven Indonesian ministers, indicates the strong commitments on the part of both parties to go ahead with the US$35 billion project.

The Natuna gas field, located 225 kilometers northeast of Natuna island in the South China Sea, has been on and off the drawing board for nearly 10 years. It was initially assessed as commercially unviable because its recoverable hydrocarbon gas reserves, estimated at more than 160 trillion cubic feet, carry a high carbon-dioxide content. But the project was later revived after the development of technology that is capable of safely disposing of the carbon dioxide and other impurities.

However, negotiations for the project, lasting for nearly 10 years, have not been easy. They were called off completely in July, 1993, after a deadlock regarding financing, tax and profit- sharing, but were resumed three months later.

Indeed, negotiations for a natural gas development project that involves a liquefaction plant are always complex; let alone for such a huge project as the Natuna field. Different from crude oil, natural gas cannot be stored. Once it is produced and transported it must immediately be delivered to buyers. Neither does it have a spot market. Hence, negotiations involve both complex calculations of financing requirements and a long-term pricing formula, as well as potential buyers.

The sheer size of the Natuna gas project adds to the complexity. Though Indonesia, currently the world's largest LNG exporter, is well experienced in gas liquefaction, since 1977 -- there are now two LNG plants in both Aceh and East Kalimantan, -- it has never handled such a huge gas development project.

Several indicators of the size and complexity of the Natuna project: It will have an annual production capacity of 35 million tons, much higher than the 24 million tons currently produced by the two LNG plants, and at least 18 offshore structures and almost 1,000 kilometers of pipelines, which will require millions of tons of structural steel, have to be constructed.

Given the complex designing, engineering and civil work that has yet to be done, it is estimated that the Natuna project will take about 10 years to complete. That, we think, makes it even more imperative for both Pertamina and Exxon to tie up the remaining loose ends as soon as possible so that the final agreement can be signed in January as scheduled.

Obviously, the project will be greatly beneficial to both parties in view of the steady, steep rise in the demand for natural gas -- due to its clean-burning quality -- in Asia. Energy analysts recently project the LNG demand in Asia to double within the next 15 years from the 50 million tons a year now.

Indonesia also badly needs the new gas development venture to earn more foreign exchange because its exportable oil surplus has been decreasing due to the steeply rising domestic demand. And the new LNG capacity is required to meet additional demands from buyers in Japan, South Korea and Taiwan, which together now take about 24 million tons a year. Moreover, the gas reserves in Aceh and East Kalimantan are estimated to deplete within the next 15 to 17 years.