LNG: Chasing Tangguh All the Way to China

Chasing Tangguh All the Way to China

Jakarta, Suara Indonesia News - The Tangguh gas contract has created losses so Indonesia will
renegotiate it with China, perhaps offering a price of US$7 per
mmbtu. But this has now become a political issue.

THERE was something unusual about the cabinet meeting in the
presidential office on Thursday last week. Usually, only
photographers and cameramen are allowed to take pictures of the
President and ministers. This only lasts for five minutes, then
they are asked to leave. However, on this occasion, President
Susilo Bambang Yudhoyono allowed electronic and print media
reporters to enter the meeting room and submit their questions.

For so many times, Vice President Jusuf Kalla questioned the
sales contract of liquefied natural gas (LNG) from the Tangguh
field, Papua, to Fujian Province in China. "Pardon me, but this
formula is the worst in the history of the oil industry," said
Kalla. The contract is loss-making, especially when the price of
oil is high.

On this occasion, the President appointed Coordinating Minister
for the Economy, Sri Mulyani Indrawati to lead the Tangguh
contract renegotiation team. Its tasks are to formulate a
holistic price target and to aim for another contract. Half
jokingly, Kala also included a message for the renegotiation
team. "Let there be no doubt. Strategic interests remain in my
hands because it is the President who is responsible."

For almost a week now, the weaknesses of the Tangguh gas sales
contract have been a matter of public discussion. It was Vice
President Jusuf Kalla who triggered this when he visited Beijing
last week. After attending the closing ceremony of the Beijing
Olympics, Kalla met with China's President Hu Jintau and Vice
President Xi Jinping. The renegotiation of the contract for gas
sales from Tangguh to Fujian Province in China, was the main
item on the agenda.

Indonesia wants the Tangguh gas sales contract to be revised
because it is making causing losses. This contract was signed in
2002, when President Megawati was in power. Speaking in Bandung,
West Java, on Friday last week, Kalla said that if the contract
was not renegotiated then Indonesia would loss US$75 billion.
The House of Representatives (DPR), according to him, must
review this contract. Several DPR members have responded to
Kalla's wish. The Supreme Audit Agency (BPK) has even taken the
initiative of planning to audit the Tangguh contract this month.

The Tangguh gas sales contract to Fujian was obtained
"unintentionally." The Tangguh field, which has gas reserves of
14.4 trillion cubic feet, was prepared for a sales tender to the
Province of Guangdong. However, Indonesia lost out in this
tender. The lobbying even included a six-minute dance between
Megawati and Zhiang Zemin, the President of China at that time.
But this was not enough to stop Australia from winning the
tender. The efforts made by Taufik Kiemas, Megawati's husband,
who had previously visited Prime Minister Zhu Rongji, turned out
fruitless. However, China was exceptionally generous, offering
Indonesia the chance to supply gas to Fujian without a tender.

Ever since it was signed in 2002, the sales to Fujian have
created a controversy. Observers, experts and also politicians
have been raising a variety of questions. The issue in question
is the formula for the gas sales price. In the contract with the
Government of China, the gas sales price was set at US$2.4 per
million cubic feet (mmBtu) for 25 years. This sales price was in
fact not that bad. As a comparison, in the same year, Qatar won
a tender to supply gas to Taiwan at a price of US$1.8 per mmBtu.

The problem is that the formula for the Tangguh gas sales price
was set based on the Japan crude cocktail (JCC) price of US$25
per barrel. This meant that the sales price of gas could only be
raised to an oil price of US$25. Indonesia does not receive any
additional revenue if the price of oil exceeds this figure.

This formula is by no means ordinary. Normally, the formula for
the sale price of Indonesian gas is always linked to
fluctuations in the price of oil without the consideration of
the highest oil price limitation. This standard formula was used
by the state oil and gas company Pertamina when it signed gas
sales contracts with Japan for both the Arun field, Nanggroe
Aceh Darussalam, and the Badak field in Bontang, East Kalimantan.

The Tangguh gas sale price became more and more of a problem
after the price of oil crept up to above US$50 per barrel. In
2006, Jakarta eventually requested that the sales contract be
renegotiated. The Government of China agreed that the gas sales
price be increased to US$3.35 per mmBtu. But, once again the
sales price formula was still set with a limitation on the price
of oil. The difference this time was that the set price of oil
to a maximum of US$38 per barrel.

Now the price of oil is way above this figure. In less than a
year, the price of oil has continued increasing to a level of
US$150 per barrel. The price has, in fact, dropped back
somewhat, but it is still high, at a level of US$115.59 per
barrel at the end of last week. Not surprisingly, there is now
increasing pressure on the Government to renegotiate the Tangguh
gas sale contract. The climax occurred after Kalla visited
Beijing.

According to energy observer Kurtubi, the renegotiation of the
Tangguh contract is an indication that the Government has
already acknowledged that the natural gas price formula is
creating losses to this republic. This is because the sales
price of gas is tied to an oil price of US$38 per barrel. For 25
years, the sale price of Tangguh gas to Fujian will never
increase much above the level of US$3.35 per mmBtu, not even if
the price of oil skyrockets. "This is a mistake of the
Government," he said.

Now that the price of oil stands at US$115 per barrel, the price
of gas on the international market is approaching US$20 per
mmBtu. The difference between the sales price to Fujian and the
international price is like the difference between the earth and
the sky. There is also a great difference when compared with the
Badak sale price. Currently, the Badak gas sales price has
reached US$17 per mmBtu. "If the old Tangguh formula is
maintained, then Indonesia will end up losing US$3 billion (Rp30
trillion) per year," said Kurtubi.

A graduate of the Colorado School of Mines, USA in energy
economics, Kurtui is amazed at how the Tangguh gas negotiation
team accepted the formula presented by China. In 2002, the price
of oil and gas were both on the decline. However, this was a
temporary phenomenon as the oil and gas prices rose again.

Based on data from the primary energy price index, according to
him, the price of oil, gas and coal all have positive
correlations. When the price of oil goes up, the price of gas
will also go up. And the reverse is also true. So, he said, the
members of the negotiation team broke a natural law when they
accepted a limited oil price of US$38 per barrel. "This assumed
the price of gas would not rise for 25 years in a row," he said.

Energy and Mineral Resources Minister, Purnomo Yusgiantoro, who
was Energy Minister during the Megawati era, used a deception,
saying that the price of gas to Fujian was the result of the
tender in Guangdong. The formula that determined the price of
oil was in fact included within the invitation to bid.

The less than optimum price also had a great deal to do with the
low price of LNG on the international market at that time.
"There were many people selling and there were also many gas
producers," he said after attending an exchange of opinion
meeting with the DPR Energy Commission last week. In fact,
according to him, previously Indonesia had also lost tenders in
Taiwan and Korea.

Aware that the Tangguh contract was loss-making, the Government
promised to renegotiate. "This is a way to change other gas
contracts," said Purnomo. Evita Legowo, the Director General of
Oil Gas, added that the Department of Energy was currently in
the process of trying to create a new formula for the Tangguh
gas sales price, one that is linked to the global price of oil
and without any limitation. If there were to be any limitation,
he said, this would certainly be increased to above US$38 per
barrel.

According to Kalla, the Beijing government is prepared to change
the contract agreement. There are already such indications, one
of which is the proposal to change the price to US$3.6 per mmBtu
from the current US$3.35 per mmBtu. Kalla himself was not
prepared to state what price Indonesia was actually hoping for.
However, based on Kalla's calculations when he talked about
losses, it seems that Indonesia will be positioning itself at a
price level of US$7 per mmBtu.

However, a Tempo source in the Government has a different story.
In order to try and revise the Tangguh contract, according to
this source, the Government has already held meetings on several
occasions with the Chinese Government. But changing the contract
for a second time is apparently not that easy. "There were very
many negotiations. They even sent letters of rejection," the
source told Tempo in Jakarta.

This attitude of Beijing supported Vice President Kalla to meet
with Hu Jintau on August 25 this year. Previously, according to
him, "The meeting was to be followed up on September 8, but this
has been delayed because all of a sudden President Yudhoyono set
up a new team." Xie Yonghui, a press officer at the Chinese
Embassy in Indonesia, was not prepared to make an official
statement regarding this matter.

Kurtubi cautioned that there was no certainty this renegotiation
between Indonesia and China would yet obtain optimum results.
This is because the China National Offshore Oil Corporation
(CNOOC) has a conflict of interests as regards the
sales-purchase of Tangguh LNG. This company, which is owned by
the Government of China, is both a purchaser of gas as well as a
seller of gas. This Chinese oil giant has controlled a 17
percent working interest in the Tangguh blocks, ever since it
acquired this from BP Plc. in 2003. "In any event, China wants
cheaper prices," he said.

In addition, Kurtubi has also requested that if the sales price
for gas from Tangguh ends up using the old system, then the
Government should cancel the contract. "Just switch it over to
Japan because they really do need gas."

According to him, there is a real possibility that the contract
will be cancelled because this eventuality is in fact already
covered within the agreement. Of course there are risks
involved. However, these are not in fact that great when
compared to the losses that will have to be borne by the nation.
Specifically for the Fujian contract, said Kurtubi, Indonesia
will only face a maximum penalty of US$300 million (around Rp2.8
trillion) if it does not supply the gas there. However, if the
contract is cancelled, then Indonesia will be able to obtain
additional revenues of at least US$3 billion per year.

China, said Kurtubi, could of course take Indonesia to
international arbitration. However, he said he was convinced
that it would not have the courage to do this. "The people of
Indonesia are too important as a market for Chinese products,"
added Kurtubi.


l l l

THE current commotion over the Tannguh contract is after all not
just related to economic concerns. The ramifications of this
problem have already extended to the political sphere. According
to a Tempo source, who accompanied Vice President Jusuf Kalla on
his trip to Beijing, the Tangguh contract will end up becoming
ammunition if the Indonesian Democratic Party of Struggle
(PDI-P) makes use of its enquiry rights as far as fuel is
concerned.

This is because the DPR plenary session on June 24 this year in
fact made the decision to permit enquiry rights as regards the
Government's policy to raise fuel prices. Together with several
other political parties, PDI-P is one party that strongly
supports the DPR investigating into this matter. In addition to
the fuel increase policy, another matter that has been
highlighted is the suspicion that some sort of mafia
organization is involved in oil imports.

Alvin Lie, a DPR member from the National Mandate Party (PAN)
faction, acknowledged that the Tangguh issue could also be a
political issue for Kalla, who is also chairman of the Golkar
Party, to use to shoot at Megawati. "It could certainly be an
effective bargaining position." Predictably, PDI-P politicians
are becoming worried about Kalla's statement.

Kebagusan—the PDI-P headquarters—certainly rejects the
politicization of the Tangguh contract. Taufik Kiemas, who met
with Tempo at Mega Dzikir in Jakarta last week, pointed out that
the Tangguh contract agreement is the Government's not an
individual's responsibility. "There is no way this can be linked
to one particular party (PDI-P)," he said.

Similarly, PDI-P Secretary General Pramono Anung has also
emphasized that the Tangguh contract cannot be linked to one
party. The signing of this business contract was the
responsibility of the Government, rather than the private
responsibility of Megawati. If this were to be questioned, he
said, Yudhoyono and Kalla were in fact also involved because
they were assisting the President at that time. This graduate in
Mining Technology from the Bandung Institute of Technology also
called on Yudhoyono and Kalla not to seek the blame on the
mistakes of previous governments.

Not wanting to be left out, Mukhlis Hasyim, a member of the Vice
President's special staff, also said he was convinced that there
was no political motive behind Kalla's request to renegotiate
the Tangguh gas contract. "His motives are only the economic
consideration and the interests of the nation, because the total
value of the Tangguh field is huge," Mukhlis told Tempo.

It is likely that this problem could snowball in the future. In
addition to the struggle over inquiry rights, the general
election is not that far away. This problem might end up
becoming ammunition for the Golkar or the Democrat parties to
attack the Indonesian Democratic Party of Struggle (PDI-P). And
eventually this could also end up becoming a factor in the
presidential race between Yudhoyono and Megawati.

Padjar Iswara, Bunga Manggiasih, Amandra Mustika Megarani, Ninin
Damayanti and Anton Aprianto

Tangguh LNG field:

Buyers Contract Length Price*

Fujian (China) 25 years 3.35

SK Power (Korea) 20 years 3.5

SK Posco (Korea) 20 years 3.36

West Coast (USA) 20 years 5.94

Arun LNG:

Japan 40 years 16

Badak LNG:

Japan 20 years 17

From China, To China

Vice President Jusuf Kalla seems bent on criticizing the Tangguh
project. This year alone, Kalla has said in public that the sale
of natural gas (LNG) from the fields in Papua's Bintuni region
to China's Fujian province do not benefit the nation. Kalla
feels the price of US$3.3 per mmBtu is far below what it should
be. "This contract is really loss-making," he said, after he met
with China's Vice President Xi Jinping in Beijing, last week.

End of 2001

Indonesia, though BP Marketing Ltd. (BP Indonesia) and supported
by Pertamina, offered LNG to Guangdong province in China.

August 2002

Australia, through the North West Shelf, beat Indonesia in the
Guangdong tender, which was worth US$25 billion. The Australian
contractor is a joint venture between Woodside, the Royal
Dutch/Shell Group, ChevronTexaco Corp., BHP Billiton, BP and
Japan Australia LNG.

August 8, 2002

China's Foreign Minister Zhu Rongji appoints Indonesia directly
as the supplier of LNG to Fujian province, amounting to 2.6
million tons per year for 25 years.

September 24, 2002

Pertamina signs a sales contract with CNOOC to send gas to
Fujian. There were rumors that the sale price was only US$2.4
per mmBtu.

September 27, 2002

CNOOC agrees to purchase BP Plc's 12.5 percent share BP Plc in
the Tangguh gas field, worth US$275 million. This was a
follow-up to the gas sale to Fujian. The first shipment was
scheduled for 2007.

September 30, 2002

Energy Minister Purnomo Yusgiantoro denies the sale price of gas
from Tangguh to Fujian was lower than Australia's sales price of
gas to Guangdong.

October 24, 2002

BP Migas acknowledges that the sale price of liquefied natural
gas to Fujian was US$2.4 per mmBtu. This price was considered to
be higher compared to the tender in Guangdong by using the Japan
crude cocktail (JCC) price formula amounting to US$20 per barrel.

August 9, 2004

The Tangguh Project Special Review Team sumits three options on
the purchasers' request that the Government pay compensation
amounting to a maximum of US$300 million. This was if there were
breakdowns in the supply chain as a result of new government
policies, also referred to as a government act.

First, the government act clause does not need to be regulated
in the principles of agreement. This is not unusual in terms of
being included in an upstream oil and gas enterprise contract.
Second, the government act clause was included in the agreement,
but limited to emergency conditions or force majeure. Third, the

government act clause included in the agreement states that the
government or BP Migas would be fully responsible—with certain
limits—over obligations arising as a result of new policies.

March 2005

After a long consideration, the government agrees to pay
penalties if LNG

shipments are disrupted as a result of government policy. Claims
would be handled first by the contractor.

December 9, 2005

BP Indonesia renegotiates with the government of Fujian
regarding contract materials. There were no significant results.
January 20, 2006

BP Migas carries out renegotiations because the price of US$2.4
per mmBtu was too low. CNOOC is prepared to increase the gas
sales price, but BP Migas has not yet accepted the figure
offered.

End of 2006

The sale price of gas from Tangguh to Fujian is revised to
US$3.3 per mmBtu.

March 6, 2008

Vice President Jusuf Kalla requests that the sale price of
Tangguh gas be revised in order to be in line with fluctuations
in global gas prices. The current contract is not considered to
benefit the nation because it is so low and is in the form of a
fixed price. This request was made when he met with the UK
Special Envoy for Trade and Investment, Prince Andrew.

August 24, 2008

Jusuf Kalla visits China. During his meeting with the Chinese
Vice President Xi Jinping, Kalla asks that China be prepared to
re-discuss the Tangguh gas sales-purchase contract. The sales
price of gas from the fields in Papua is considered to be lower
than that of both the Arun and Bontang fields. (RED)