The ASEAN urea plant

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.