Indonesia to Halt LNG Exports from Bontang, Arun Terminals by 2020

An End to Exports

By 2020, the world's third-largest LNG exporter Indonesia plans to halt shipments of LNG to overseas markets from two currently operational liquefaction terminals at Bontang and Arun. Indonesia's Gas Balance 2010-25 document stipulates that Indonesia's oldest LNG plant at Arun would cease exports by 2014 due to dwindling natural gas reserves, while R. Priyono, head of Indonesia's oil and gas regulator BPMIGAS, confirmed that output from gas fields serving the Bontang terminal would be diverted for use as feedstock in electricity generation and for fertiliser and petrochemical production by 2020.

The decision to reorient output from Bontang has been triggered by Indonesia's rising gas demand. Natural gas supply and demand will see a deficit of 23.3% in 2010 based on existing contracts combined with available supplies, equivalent to a shortage of 2,554 mmcf/d, according to Indonesia's Energy and Mineral Resources Ministry (ESDM). BPMIGAS also estimates that Indonesia's potential gas demand will grow at 2.8% per annum over the next decade, hitting 6.0 bcf/d by 2020 compared with 4.2 bcf/d in 2007, with demand growth particularly sharp on the island of Java.

Indonesia's increasingly precarious gas demand situation has prompted the ESDM to become more assertive about reorienting available supplies to the domestic market. In 2009 a presentation by the ESDM on Indonesia's Gas Pricing Policy stipulated that gas utilisation should meet domestic needs first and that the domestic market must be given priority for new gas reserves. Over the course of Bontang's life, the government has occasionally diverted gas from fields supplying the terminal to Pertamina so it can sell subsidised output to local fertiliser producers.

However, the government has now become more aggressive in diverting gas supplies for domestic use as demonstrated by the downgrading of long-term LNG export contracts with Japanese buyers from Bontang, which will fall from 12 million t/y currently to 3 million t/y between 2011 and 2015, and 2 million t/y between 2016 and 2020 (see Indonesia: 20 January 2010: Indonesia, Japan Move Forward Negotiations on LNG Contract Extensions). The downgrades have been accompanied by pressure from NOC PT Pertamina to acquire a stake in the Mahakam gas field—the largest single supply source for the Bontang plant—from Total Exploration & Production when the existing production sharing contract (PSC) expires in 2017. To up the pressure on Total to comply, the government has said that it will take over operatorship of the block in 2017 if Pertamina proves unsuccessful in farming into the block.

The emphasis on reorienting supplies from Bontang is largely because of its location, near Indonesia's major consuming markets such as Java and Sumatra. The government envisages Bontang playing a key role in reducing electricity shortages, maintaining stable fertiliser supplies to support the agricultural sector, and providing low-cost gas supplies to industries in the region to encourage economic growth. Unlike at Arun, the government is aiming to keep the terminal operational over the longer term through exploiting deepwater reserves in the Makassar Strait and even by directing coal bed methane reserves from BP's Sanga Sanga PSC in East Kalimantan (see Indonesia: 1 December 2009: BP, Eni Pioneer First CBM-to-LNG Project in Indonesia).

Outlook and Implications

The changing role of the Bontang LNG plant does not mean that Indonesia's role as an LNG exporter is in interminable decline. The government is keen for new terminals in more remote areas of the country to continue exporting LNG as it is more profitable than supplying the domestic market and because exporting LNG can attract investment for large new projects.

Over the next decade, the BP-led Tangguh LNG terminal in Papua, eastern Indonesia, is likely to become Indonesia's leading LNG exporter. The two-train plant, which haltingly launched operations in 2009, is already exporting to companies such as Sempra Energy, K-Power, CNOOC, and South Korean steelmaker POSCO. BPMIGAS signed a further LNG export contract with Chubu Electric a few days ago from the Tangguh plant at a very good rate of US$12.50/mmBtu when the basket of crude oils that make up the Japan Crude Cocktail (JCC) price is US$80/b, suggesting that the government is continuing to promote the terminal's role as an exporter of LNG despite pressure for supplies from Indonesian gas distributor PGN (see Indonesia: 9 March 2010: BPMIGAS Signs LNG Supply Deal with Japan's Chubu Electric).

Despite the controversy in the run-up to Indonesia's presidential election over how gas from the proposed Senoro-Donggi LNG project will be marketed, the terminal now looks likely to play a limited role in boosting Indonesia's LNG exports. Mitsubishi recently offered US$2.5 billion in funding for the terminal if LNG would be exported to Japanese customers. The reluctance of domestic buyers to purchase the gas and the government's reluctance to sacrifice funding from the Japan Bank for International Cooperation (JBIC) for the project by allocating supplies for domestic use suggests that a compromise solution will soon be reached (see Indonesia: 3 March 2010: Mitsubishi Pledges US$2.5 bil. to Construct Stalled Donggi-Senoro LNG Terminal in Indonesia). Hilmi Panigoro, president commissioner of project partner PT Medo Energi Internasional has said that an announcement from the government is likely, confirming that around 70% of the terminal's output would be exported to Japanese utility companies Chubu Electric Power and Kansai Electric Power, with the remaining 30% used for domestic consumption.

Indonesia's role as an LNG exporter looks likely to shrink towards 2020 and Australia will benefit by becoming the main Asia-Pacific LNG supplier to hungry Asian markets. Only towards the end of the next decade might Indonesia be able to significantly boost exports as the Masela project in the remote Arafura Sea and the giant Natuna D-Alpha project in the Natuna Sea approach the launch of commercial operations (see Indonesia: 9 December 2009: Gas from Indonesia's Natuna D Alpha Reportedly to Be Mostly for Export).