Monday, August 25, 2008

VP to drop 2002 cheap LNG deal with China

Vice President Jusuf Kalla's weekend trip to Beijing has led to promises to renegotiate a controversial 2002 deal to export LNG to China at a price far below market value.

After a Sunday meeting with Chinese Vice President Xi Jinping, Kalla said the two had agreed to renegotiate a 2002 contract to supply liquefied natural gas (LNG) from Indonesia's Tangguh field in Papua to Fujian province.

"In principle they have understood and received (our proposal for renegotiation) well. The two countries will set up a team to further discuss the issue," said Kalla after meeting Xi as reported by Antara.

"If we compare the LNG Tangguh contract signed in 2002 with today's (prices), the (contract) price is far lower. That's why we want to talk about the contract again," he said.

Kalla believed the 25-year contract for LNG export to China, made during the administration of president Megawati Soekarnoputri, would lead Indonesia to high losses once the export begins next year.

Under the contract, according to Kalla, the price of LNG had been pegged at US$2.40 per million British thermal units (mmbtu) regardless of any increase in crude oil prices.

At present the international LNG price is around $20 per mmbtu.

The LNG price at the time of the contract's signing was based on a crude oil price of $20 per barrel.

The Chinese government had earlier agreed to raise the price to $3.80 per mmbtu but the Indonesian government refused the offer, saying it was still too low.

Analysts have repeatedly criticized the contract, calling it foolhardy to assume the world oil price would remain at 2002 levels.

Kalla had demanded the House of Representatives investigate the inking of the contract for irregularities, calling it the country's most bungled LNG contract ever.

"The House must investigate this (through the ongoing inquiry session). This is the most devastating contract ever made, and it is the worst," said Kalla, who is also chairman of the Golkar Party, which has the majority of seats in the House.

Energy and Mineral Resources Minister Purnomo Yusgiantoro, who held the same post during the Megawati administration, played a key role in the 2002 negotiation with the Chinese government.

President Susilo Bambang Yudhoyono, who was the Energy and Mineral Resources Minister during then president Abdurrahman Wahid's administration in 2000, was also actively involved in trying to sell the gas to China.

The operation of the Tangguh LNG plant is led by BP Plc, Europe's largest oil and gas company, and will start supplying 2.6 million tons of LNG annually to China's Fujian province.

Located in the Berau-Bintuni region, the Tangguh plant is expected to produce 7 million tons per annum in the first phase of production scheduled in 2009. Gas fields, which will feed the plant, have proven reserves of 14.4 trillion cubic feet.

Korea Gas Corp has recently agreed to buy Tangguh LNG at the record price of $20 per mmbtu.

Buyers of the LNG also include the United States company Sempra Energy LNG Corp, South Korea's steelmaker POSCO and power firm K. Power.

From : The Jakarta Post

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