by The Jakarta Post website   BBC Monitoring Asia Pacific
Thursday, July 24, 2008


Korea Gas Corp (Kogas) has agreed to buy liquefied natural gas (LNG) from the Tangguh project at the record price of USD 20 per million British thermal units (mmbtu).

"We haven't signed a legal document yet, but we have agreed on the price," said BP Migas' Deputy of Operations, Eddy Purwanto on Wednesday [23 July 2008], adding that this price was the highest for any existing gas field, including Arun and Bontang.


The price, however, is based on the Japan Crude Cocktail (JCC) oil price of USD 120 per barrel, Purwanto said.


Purwanto refused to specify the volume of LNG that Kogas would buy from Tangguh, saying this was still being negotiated. Kogas would start buying the LNG from 2010 to 2012, he said.


Tangguh is a massive project, exploiting gas fields in the mountainous Bintuni Bay area in Papua, with total proven gas reserves of 14.4 trillion cubic feet.


Purchasers of Tangguh's LNG include the US company Sempra Energy LNG Corp, China's Fujian Province and South Korea's steel maker POSCO, as well as energy firm K-Power.


Purwanto said that the LNG that Kogas was to purchase was originally intended for Sempra Energy LNG Corp. In 2004, multinational energy giant BP, the Tangguh project operator, signed a sales agreement with Sempra to supply up to 3.7 million tonnes per year of LNG.


Energy Minister Purnomo Yusgiantoro said in May 2007 that under the Sempra contract, BP may divert up to 50 percent of LNG designated to Sempra to other markets.


Purwanto said this diversion was part of government and BP efforts to get better LNG prices and to increase the total value of the Tangguh project.


Unlike Asian LNG buyers, Sempra is not an end user but a trader. The Tangguh LNG price for Sempra is based on the US gas market price at the time when the gas is shipped.


Fathor Rahman, BP Migas Head of Oil and Gas Market Development, said that although the LNG price for Kogas could fall due to fluctuations in the JCC, it was unlikely to fall lower than the price for Sempra.


"Only in special cases, like the aftermath of the Katrina storm, might the LNG price for Sempra get higher than that for Kogas," Rahman said.


He added that if this extraordinary situation occurred, Kogas had agreed to pay a higher price, following the United States price- lead.


Purwanto said the Sempra diversion would increase the average LNG price from the Tangguh Project to USD 8.21 per mmbtu, up from USD 5.76 per mmbtu before the diversion, assuming the JCC price at USD 120 per barrel. This diversion would potentially increase the contract value of the Tangguh project by USD 19.7 billion, he said.


The government has been heavily criticised by analysts for selling Tangguh's LNG at very low prices. In 2002, the LNG price was based on a ceiling oil price of USD 25 per barrel. According to energy analyst Kurtubi, with this ceiling price, the price of Tangguh's LNG would be only USD 2.67 per mmbtu.


Later, in 2006, the government and buyers increased the ceiling oil price to USD 38 per barrel. Kurtubi said that with this new ceiling oil price, Tangguh's LNG would be worth only USD 3.345 per mmbtu, lower than Badak and Arun's LNG with prices of between USD 5.7 per mmbtu and USD 6.08 mmbtu.


Kurtubi urged the government to renegotiate Tangguh's LNG price. He said that the LNG price was supposed to be based on international crude oil prices without ceilings or limitations.


Purwanto said that the lower LNG price occurred because it was a buyer's
market [at the time] when the commitment was made.


"The price was the best that we could get. At that time no-one, including
the analyst, predicted the crude price would sky-rocket," Purwanto said.


Currently, the government is renegotiating the LNG price with China and
Korea.


"If we cannot manage to complete this by the end of this year, we will
probably postpone Tangguh's LNG shipments," he said.