Newsletter No. 1418
News-Analysis
July 22, 2009

 

The following newsletter has been written by David Adam Stott (Shingetsu Member No. 17). Stott is based at The University of Kitakyushu.

JAPAN-INDONESIA LNG RELATIONS UNDER FURTHER STRESS

In Newsletter No. 1339 of April 11, 2009, we examined the tensions between the Indonesian government and Japanese investors with regard to the new Senoro liquefied natural gas (LNG) project in Sulawesi. Despite Jakarta’s fears that customers in Japan and South Korea would cancel their contracts to buy Indonesian LNG in the current economic climate, it was playing hardball with regard to Senoro LNG prices. On July 14, the Indonesian government ratcheted up the pressure by stating that two Japanese utilities cannot take Jakarta to international arbitration for breach of their purchasing agreements over LNG to be supplied from the plant.

The two firms are Kansai Electric and Chubu Electric, which in February 2009 signed provisional sales agreements to buy one million tonnes (MT) each of Senoro LNG per annum over fifteen years. Press reports at the time estimated the value of the deals at US$7.7 billion. However, the following month, Indonesia’s Energy and Mineral Resources Ministry rejected the contracts with Kansai and Chubu on the basis that the agreed prices were too low. The contracted gas price had been set at US$3.85 per million British thermal units (MBTU). Despite the fact that this price would rise under the Japan Crude Cocktail (JCC) index if oil prices also increased, in March 2009 chief supplier Pertamina began to argue that the agreed price was too far below prevailing global prices of between US$8 and US$9 per MBTU. [1]

The Senoro consortium consists of Pertamina, Medco, and Japan’s Mitsubishi Heavy Industries. Whilst Mitsubishi has a 51% stake in the US$1.4 billion Senoro development, local firms Pertamina and Medco control the natural gas that the plant will process into LNG. This gas will come from the Matindok and Senoro fields in Central Sulawesi. Matindok is located in the Donggi block, wholly owned by Pertamina, the state oil and gas company; and the Senoro field is located in the Senoro-Toili block, owned equally by Pertamina and Medco. Survey results indicate an annual yield of 2 MT, all of which was seemingly destined for Japan. However, on June 18, Indonesian Vice President Jusuf Kalla announced that all gas from the Senoro plant should be sold domestically: “We cannot export gas overseas, while at the same time our industry faces gas shortages. Independence in energy is critical.” [2] He was referring to the fact that in 2005 Indonesia became a net importer of oil, a reality that has subsequently cost the Indonesian government dear in fuel subsidies.

As a result of Kalla’s comments, it was rumored that Chubu and Kansai could seek international arbitration to settle the case, which could potentially threaten the feasibility of the whole Senoro scheme. However, on July 14, 2009, Evita Legowo, the Energy Ministry’s director general of oil and gas, dismissed this possibility as the initial supply agreements were only provisional and the ministry has to approve sales prices before they are finalised. She added that, “The government has not signed anything related to the project. The initial agreement was between the companies concerned.” [3]

Conscious that Japanese customers will likely pay more for the gas than if it was sold locally, the consortium has maintained that export is the best option for both the plant’s financial viability and Indonesia’s reputation as an investment destination. Following Kalla’s remarks, Pertamina said the consortium was still planning to export most of the output to Chubu and Kansai, noting that Mitsubishi’s participation in the scheme is predicated on the Senoro gas reaching the Japanese market. Given that Indonesia lacks the expertise to exploit and develop its own gas resources and needs foreign investment to fuel its own economic growth, Mitsubishi’s role in the Senoro project is considered the key to its feasibility.

Mindful of its increasing difficulties in securing a continued supply of Indonesian natural gas, Tokyo had actually demanded Senoro LNG supply guarantees as part of the Japan-Indonesia Economic Partnership Agreement (JIEPA) signed in August 2007. At the time, Jakarta cited a lack of infrastructure to supply it to the domestic market as a reason why the LNG would be exported to Japan. It has since been announced that some gas from the Senoro-Toili Block will be transported to local customers via a 30-kilometre pipeline being constructed by Pertamina and Medco. In addition, within Indonesia there has been an increasingly loud chorus of disapproval over the export deal, and legislators from the House of Representatives’ Commission VII on energy have criticised policy makers for selling natural gas to the Senoro LNG plant too cheaply.

Indeed, lawmaker Effendy Simbolon has even suggested that Pertamina take a controlling interest in the consortium. However, Karen Agustiawan, Pertamina’s president director, replied that the loan agreement which finances the project is with the Japan Bank for International Cooperation and it prescribes that Mitsubishi hold a majority stake in the consortium. As a result, Pertamina has been negotiating with Medco to buy a further 2% stake in the Senoro scheme, thus reducing Medco’s share from 20% to 18%. Agustiawan explained the logic behind Pertamina’s decision: “With a 29% stake, we will get a rate of return on our investment of only 6% to 7%. With a 31% stake, we would have to be involved in the project’s decision-making process.” [4] Indonesian corporate law specifies that a shareholder only gains decision-making rights if it holds a minimum 30% stake. At present, Pertamina has a 29% interest in the project, Medco 20%, and Mitsubishi a controlling 51%; so a 31% stake would give Jakarta more leverage over the project.

The Senoro project, which has been repeatedly delayed by protracted pricing negotiations, will be Indonesia’s fourth LNG processing plant after Arun in Aceh, Bontang in Kalimantan, and the recently opened Tangguh in Papua (see Newsletters Nos. 778, 1004, 1012, 1040, and 1077). Senoro had been scheduled to open in 2011, but is now slated to come on line by 2012 or 2013. Even though construction work was originally due to begin in 2007, Jakarta recently delayed the Senoro project again by setting six preconditions for final approval of the plant’s construction, chief among them a price increase. It now seems the Indonesian side is trying to secure better terms from Mitsubishi and its Japanese customers, mindful of the furor surrounding its underselling of LNG to China and South Korea from the new Tangguh plant in Papua province. With the Tangguh issue having become politicised in campaigning for the July 2009 presidential elections, the current administration wanted to be seen to play tough with Japanese investors and customers. As a result, it seized on a February 2009 floor-price proposal made by the House of Representatives’ Commission VII on energy.

The main precondition is therefore Japanese acceptance of an absolute minimum price, determined by the Indonesian government, which would apply if crude prices fell below US$40 a barrel. The February 2009 provisional sale agreements did not specify any minimum price for the Senoro gas. According to the Indonesian government, the Mitsubishi-led consortium has to meet five other requirements for final approval. These include selling 25% of the gas in the domestic market, a revision to the project’s development plan, and a resolution to an outstanding legal dispute between Mitsubishi and PT LNG Energi Utama. This dispute dates back to August 2008, when Jakarta-based Energi Utama sued Mitsubishi for more than US$709 million in damages. In addition to claiming it had exclusive rights to the Senoro scheme, Energi Utama accused the Japanese firm of purloining confidential information regarding production costs, thus unfairly enabling it to win the LNG plant construction contract. Energy and Mineral Resources Minister Purnomo Yusgiantoro emphasised in March 2009 that a resolution to the legal dispute was a prerequisite for securing final government approval.

That same month, Energi Utama formally lodged a claim against Mitsubishi with Indonesia’s Business Competition Supervisory Commission (KPPU), which subsequently launched an investigation. Three months later, the KPPU cleared Mitsubishi of the alleged unfair business practice charges, citing a lack of evidence. Nonetheless, the body criticised Pertamina and Medco for not demonstrating appropriate corporate governance when choosing its partners in the scheme: “The two companies should have worked in a transparent way among themselves to avoid potential problems as have happened now,” the KPPU’s commissioner Dedie S. Martadisastra declared. He also pointed the finger at insufficient oversight from the government and BPMigas, Indonesia’s upstream oil and gas regulator, which contributed to the dispute and the ensuing delays. [5]

Newsletter No. 1339 noted previously that the threat of Indonesia reneging on its Senoro promises was causing a diplomatic rift between the two governments that reached all the way up to executive level. A letter from Kojiro Shijiori, the Japanese ambassador, to the Indonesian President Susilo Bambang Yudhoyono on March 19, 2009, reportedly said that Senoro’s failure would not only damage bilateral energy ties, but would also adversely affect overall investment cooperation between the two countries. Japanese Prime Minister Taro Aso subsequently discussed the matter with President Yudhoyono at the G-20 meeting in London on April 1. He reiterated Tokyo’s stance that the stability of Indonesia’s LNG supply is crucial to Japan. Nonetheless, it seems that diplomatic pressure from the very highest levels has not dissuaded Jakarta from continuing to play hardball.

It remains to be seen if LNG policy will now change on account of Yudhoyono’s convincing victory in the July presidential elections. Of perhaps more import will be the replacement of Vice-President Kalla, who many saw as the driving force behind Indonesia’s increasing resource nationalism, with the economist Boediono, a former Coordinating Minister for the Economy and governor of Indonesia’s central bank. What is certain is that overseas investors from Japan and elsewhere will be watching the Senoro developments very closely.

References

[1] Ika Krismantari, “Construction of Senoro LNG Plant May be Delayed: BPMigas,” Jakarta Post, March 17, 2009.

[2] UPI, “Setback for Japan in LNG Project,” July 14, 2009.

[3] Ibid.

[4] Reva Sasistiya, “Pertamina Hopes to Extend Stake In Donggi Senoro, Agustiawan Says,” Jakarta Globe, May 25, 2009.

[5] Upstream Online, “Mitsubishi Cleared of Senoro Probe,” June 12, 2009.