The ASEAN urea plant

"A mouse dying in a rice barn" is perhaps the most suitable adage to describe the dire condition of PT Asean Aceh Fertilizer (AAF), after the decision early this week by the outgoing administration of President Megawati Soekarnoputri to close down the 570,000-ton capacity urea factory due to an acute shortage of natural gas feedstock.

The Cabinet's decision is not yet a death sentence for the fertilizer plant, as the government must first consult all of the AAF shareholders -- the Indonesian government has a 60 percent share of the company, with the other founding members of ASEAN (Malaysia, Singapore, Thailand and the Philippines) holding the remaining 40 percent.

The condition of AAF is nevertheless absurd as it is located near the Arun gas field in Aceh, one of the world's single largest reservoirs of natural gas, the main feedstock for making urea fertilizer. ExxonMobil, the government-appointed operator of the Arun gas field, has stopped supplying gas to AAF due to dwindling gas production.

The government apparently decided to give top priority to two state-owned urea fertilizer plants (PT Iskandar Muda I and II) located near AAF, and PT Arun NGL, the government-controlled producer of LNG for export to Japan and South Korea.

The decision might make economic sense, because the two Iskandar Muda plants are much newer than AAF, which is already more than 23 years old. More importantly, Indonesia's reputation as one of the world's largest and most reliable exporters of LNG since the late 1970s must be protected. Hence, gas supplies to the Arun NGL plant must receive top priority to enable it to honor its long-term contracts with power companies in Japan and South Korea.

Some may also argue that shutting down the AAF plant will not cause big losses because the shareholders have likely already recouped their investment. At the least, after more than 23 years of operation, in terms of capital costs AAF should have been written off by now.

However, AAF is not an ordinary factory. It was the largest and the first of only two joint industrial projects ever undertaken by the governments of ASEAN member countries.

Simply closing down the plant would be damaging to the spirit of ASEAN cooperation, even more so because the condition of AAF could be partly blamed on the Indonesian government's natural-gas policy of focusing on exports of raw gas at the expense of domestic industries such as AAF, which create added value and jobs.

The proven reserves in the Arun field have been known since as far back as 1971, when the reservoir was discovered by Mobil Oil. Hence, the development of natural gas-based industries such as the NGL plant and urea factories near Arun should have been designed according to the supply capacity of the feedstock.

However, the government allowed the further expansion of the gas liquefaction and urea plants, accelerating the depletion of reserves in the Arun field. In fact, the establishment of the Iskandar Muda II urea plant, which was completed only this year, shows that the government, as the majority shareholder, is no longer interested in maintaining AAF's operations.

The protracted negotiations between ExxonMobil and AAF over the pricing of gas for their new sale and purchase agreement last year, and the subsequent deadlock that led to the abrupt stoppage of the gas supply to AAF, further hinted at the government's intention to simply let AAF die off naturally. The government should have intervened in the negotiations if it was serious about sustaining the company.

The government should have realized that pricing and long-term contracts are the most vital factors in completing gas supply agreements, because gas is not a freely traded commodity. Different from crude oil, natural gas cannot be stored for long periods. Once it is produced and transported it must immediately be delivered to buyers or users. Both buyers and sellers need to make long-term commitments to justify the investment needed to realize the benefits of gas utilization.

Not much information is available as to the financial performance of AAF and the market competitiveness of its urea. However, recommending AAF's closure without first conducting a technology audit of the factory and without exploring alternative gas supplies from other fields in the country such as the Natuna islands, or even from Malaysia, also a major gas producer, is an utterly ill-advised move, especially when it was made by an outgoing government.

Hopefully, ASEAN governments will do their best to resolve the AAF debacle. The plant is much more than a symbol of ASEAN cooperation. Most ASEAN countries need fertilizer for their agricultural development, and building a green-field urea plant certainly would require more time and need a much larger investment than rejuvenating AAF.