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Indonesia, China LNG renegotiation deal on the rocks
Publication Date : 17-04-2012
After more than six years of almost no progress, the plan to renegotiate LNG contracts with China has raised a great deal of concern over the Indonesian government’s commitment to reap maximum benefits amid skyrocketing global energy prices.
Upstream oil and gas regulator BPMigas has urged the government to expedite internal processes for a renegotiation so as to avoid growing potential losses from an agreement that was based on an unfavourable pricing system.
"If the government wants to have a new price next year, the renegotiation has to start now because it takes more than six months to conclude the process into a binding agreement,” Rudi Rubiandini, BPMigas director for operations, told reporters in a limited interview session at his office in Jakarta on Monday.
"We have given technical recommendations to the government within our authority, but it is the team formed by the government that will engage in the renegotiation process because the contract is government-to-government,” he continued.
However, as of today, the team had not made any moves to accelerate the renegotiation process.
Under a contract with China that was signed in 2002, the price of LNG from the Tangguh plant in Papua can be reviewed every four years. A renegotiation between parties in 2006 succeeded in raising the price from US$2.40 per million British thermal unit (mmBtu) to a ceiling price set in the contract of $3.40 mmBtu.
In March 2006, then vice president Jusuf Kalla expressed his dissent over the LNG deal with China, saying that the ceiling price was no longer relevant amid soaring global energy prices and prolonged domestic supply scarcity. Kalla later directly proposed a renegotiation of the LNG deal in a conversation with Chinese Vice President Xi Jinping.
The government’s renegotiation efforts became less apparent after Kalla left office in October 2009.
Rudi said the LNG price from Tangguh could be increased at least to between $6 and $7 per mmBtu, considering the current Indonesia Crude Price (ICP) had hit $128 per barrel. To set the price at that level, the current ceiling price had to be abolished, he added.
In 2011, Indonesia exported contracted LNG worth $13.87 billion. Tangguh contributes 11 per cent of the total value, or $2.77 billion, with exports to China’s Fujian province accounting for only 3 per cent, or $426 million, of the country’s total LNG exports.
Tangguh exports LNG to Japan, Korea, the US and China.
"The low price of gas exported to China actually doesn’t disturb the economics of the Tangguh LNG plant since it receives large profits from rising gas prices exported to other countries,” Rudi claimed.
In addition to Tangguh, the other two LNG plants in Indonesia, Bontang in East Kalimantan and Arun in Aceh contribute $10 billion and $1.1 billion respectively.
An energy expert from the ReforMiner Institute, Komaidi Notonegoro, agreed with Rudi that the government team has to be more active in starting the renegotiation process with the Chinese government.
Komaidi suggested the new price must be made flexible with no ceiling price. With that formula, Indonesia could also enjoy higher profits if global oil prices soared, leading to higher gas prices, he added.
"The new formula must determine the constant and the slope for the gas price. Thus, if oil prices fall, we’re still protected, and if the price increases, we can enjoy the windfall,” he explained.
A lawmaker from House of Representatives Commission VII overseeing energy, Satya W. Yudha, said the renegotiation team’s main problem was one of coordination, as it involved several ministries like the Energy and Mineral Resources Ministry as well as the Finance Ministry.
"The team has to start working as soon as possible. The House fully supports the renegotiation process so there should be no more barriers,” he said.
He agreed that the renegotiation must discuss the revocation of the price ceiling, so that the country could benefit from soaring oil prices.
LNG contract deal timeline with China
China’s Prime Minister Zhu Rongji decided on Indonesia as the preferred supplier of LNG to Fujian province with annual demand of 2.6 million tons for 25 years.
Under the supervision of president Megawati’s administration, the operator of the Tangguh LNG plant in Papua, BP Indonesia, signed a contract with China’s CNOOC for the supply of LNG to Fujian with an agreed price of $2.40 per mmBtu with the first shipment scheduled in 2007.
The Indonesian government agreed to pay a penalty should the LNG export to Fujian be disrupted by new policy.
BP Indonesia renegotiates the LNG contract with the Fujian provincial government. No significant outcome results from the negotiation.
CNOOC agrees to raise the LNG price.
The price of LNG exports to Fujian is revised to $3.40 per mmBtu.
Vice president Jusuf Kalla said the LNG price to Fujian was no longer relevant amid soaring global energy prices and must be revised.
Renegotiations with China over the price of LNG from the Tangguh field in West Papua are at a standstill, Kalla revealed.
The government sets up a working team to draft proposals for a renegotiation.