THERE was something unusual about the cabinet meeting in the presidential office on Thursday last week. Usually, only photographers and cameramen are allowed to take pictures of the President and ministers. This only lasts for five minutes, then they are asked to leave. However, on this occasion, President Susilo Bambang Yudhoyono allowed electronic and print media reporters to enter the meeting room and submit their questions.

For so many times, Vice President Jusuf Kalla questioned the sales contract of liquefied natural gas (LNG) from the Tangguh field, Papua, to Fujian Province in China. “Pardon me, but this formula is the worst in the history of the oil industry,” said Kalla. The contract is loss-making, especially when the price of oil is high.

On this occasion, the President appointed Coordinating Minister for the Economy, Sri Mulyani Indrawati to lead the Tangguh contract renegotiation team. Its tasks are to formulate a holistic price target and to aim for another contract. Half jokingly, Kala also included a message for the renegotiation team. “Let there be no doubt. Strategic interests remain in my hands because it is the President who is responsible.”

For almost a week now, the weaknesses of the Tangguh gas sales contract have been a matter of public discussion. It was Vice President Jusuf Kalla who triggered this when he visited Beijing last week. After attending the closing ceremony of the Beijing Olympics, Kalla met with China’s President Hu Jintau and Vice President Xi Jinping. The renegotiation of the contract for gas sales from Tangguh to Fujian Province in China, was the main item on the agenda.

Indonesia wants the Tangguh gas sales contract to be revised because it is making causing losses. This contract was signed in 2002, when President Megawati was in power. Speaking in Bandung, West Java, on Friday last week, Kalla said that if the contract was not renegotiated then Indonesia would loss US$75 billion. The House of Representatives (DPR), according to him, must review this contract. Several DPR members have responded to Kalla’s wish. The Supreme Audit Agency (BPK) has even taken the initiative of planning to audit the Tangguh contract this month.

The Tangguh gas sales contract to Fujian was obtained “unintentionally.” The Tangguh field, which has gas reserves of 14.4 trillion cubic feet, was prepared for a sales tender to the Province of Guangdong. However, Indonesia lost out in this tender. The lobbying even included a six-minute dance between Megawati and Zhiang Zemin, the President of China at that time. But this was not enough to stop Australia from winning the tender. The efforts made by Taufik Kiemas, Megawati’s husband, who had previously visited Prime Minister Zhu Rongji, turned out fruitless. However, China was exceptionally generous, offering Indonesia the chance to supply gas to Fujian without a tender.

Ever since it was signed in 2002, the sales to Fujian have created a controversy. Observers, experts and also politicians have been raising a variety of questions. The issue in question is the formula for the gas sales price. In the contract with the Government of China, the gas sales price was set at US$2.4 per million cubic feet (mmBtu) for 25 years. This sales price was in fact not that bad. As a comparison, in the same year, Qatar won a tender to supply gas to Taiwan at a price of US$1.8 per mmBtu.

The problem is that the formula for the Tangguh gas sales price was set based on the Japan crude cocktail (JCC) price of US$25 per barrel. This meant that the sales price of gas could only be raised to an oil price of US$25. Indonesia does not receive any additional revenue if the price of oil exceeds this figure.

This formula is by no means ordinary. Normally, the formula for the sale price of Indonesian gas is always linked to fluctuations in the price of oil without the consideration of the highest oil price limitation. This standard formula was used by the state oil and gas company Pertamina when it signed gas sales contracts with Japan for both the Arun field, Nanggroe Aceh Darussalam, and the Badak field in Bontang, East Kalimantan.

The Tangguh gas sale price became more and more of a problem after the price of oil crept up to above US$50 per barrel. In 2006, Jakarta eventually requested that the sales contract be renegotiated. The Government of China agreed that the gas sales price be increased to US$3.35 per mmBtu. But, once again the sales price formula was still set with a limitation on the price of oil. The difference this time was that the set price of oil to a maximum of US$38 per barrel.

Now the price of oil is way above this figure. In less than a year, the price of oil has continued increasing to a level of US$150 per barrel. The price has, in fact, dropped back somewhat, but it is still high, at a level of US$115.59 per barrel at the end of last week. Not surprisingly, there is now increasing pressure on the Government to renegotiate the Tangguh gas sale contract. The climax occurred after Kalla visited Beijing.

According to energy observer Kurtubi, the renegotiation of the Tangguh contract is an indication that the Government has already acknowledged that the natural gas price formula is creating losses to this republic. This is because the sales price of gas is tied to an oil price of US$38 per barrel. For 25 years, the sale price of Tangguh gas to Fujian will never increase much above the level of US$3.35 per mmBtu, not even if the price of oil skyrockets. “This is a mistake of the Government,” he said.

Now that the price of oil stands at US$115 per barrel, the price of gas on the international market is approaching US$20 per mmBtu. The difference between the sales price to Fujian and the international price is like the difference between the earth and the sky. There is also a great difference when compared with the Badak sale price. Currently, the Badak gas sales price has reached US$17 per mmBtu. “If the old Tangguh formula is maintained, then Indonesia will end up losing US$3 billion (Rp30 trillion) per year,” said Kurtubi.

A graduate of the Colorado School of Mines, USA in energy economics, Kurtui is amazed at how the Tangguh gas negotiation team accepted the formula presented by China. In 2002, the price of oil and gas were both on the decline. However, this was a temporary phenomenon as the oil and gas prices rose again.

Based on data from the primary energy price index, according to him, the price of oil, gas and coal all have positive correlations. When the price of oil goes up, the price of gas will also go up. And the reverse is also true. So, he said, the members of the negotiation team broke a natural law when they accepted a limited oil price of US$38 per barrel. “This assumed the price of gas would not rise for 25 years in a row,” he said.

Energy and Mineral Resources Minister, Purnomo Yusgiantoro, who was Energy Minister during the Megawati era, used a deception, saying that the price of gas to Fujian was the result of the tender in Guangdong. The formula that determined the price of oil was in fact included within the invitation to bid.

The less than optimum price also had a great deal to do with the low price of LNG on the international market at that time. “There were many people selling and there were also many gas producers,” he said after attending an exchange of opinion meeting with the DPR Energy Commission last week. In fact, according to him, previously Indonesia had also lost tenders in Taiwan and Korea.

Aware that the Tangguh contract was loss-making, the Government promised to renegotiate. “This is a way to change other gas contracts,” said Purnomo. Evita Legowo, the Director General of Oil Gas, added that the Department of Energy was currently in the process of trying to create a new formula for the Tangguh gas sales price, one that is linked to the global price of oil and without any limitation. If there were to be any limitation, he said, this would certainly be increased to above US$38 per barrel.

According to Kalla, the Beijing government is prepared to change the contract agreement. There are already such indications, one of which is the proposal to change the price to US$3.6 per mmBtu from the current US$3.35 per mmBtu. Kalla himself was not prepared to state what price Indonesia was actually hoping for. However, based on Kalla’s calculations when he talked about losses, it seems that Indonesia will be positioning itself at a price level of US$7 per mmBtu.

However, a Tempo source in the Government has a different story. In order to try and revise the Tangguh contract, according to this source, the Government has already held meetings on several occasions with the Chinese Government. But changing the contract for a second time is apparently not that easy. “There were very many negotiations. They even sent letters of rejection,” the source told Tempo in Jakarta.

This attitude of Beijing supported Vice President Kalla to meet with Hu Jintau on August 25 this year. Previously, according to him, “The meeting was to be followed up on September 8, but this has been delayed because all of a sudden President Yudhoyono set up a new team.” Xie Yonghui, a press officer at the Chinese Embassy in Indonesia, was not prepared to make an official statement regarding this matter.

Kurtubi cautioned that there was no certainty this renegotiation between Indonesia and China would yet obtain optimum results. This is because the China National Offshore Oil Corporation (CNOOC) has a conflict of interests as regards the sales-purchase of Tangguh LNG. This company, which is owned by the Government of China, is both a purchaser of gas as well as a seller of gas. This Chinese oil giant has controlled a 17 percent working interest in the Tangguh blocks, ever since it acquired this from BP Plc. in 2003. “In any event, China wants cheaper prices,” he said.

In addition, Kurtubi has also requested that if the sales price for gas from Tangguh ends up using the old system, then the Government should cancel the contract. “Just switch it over to Japan because they really do need gas.”

According to him, there is a real possibility that the contract will be cancelled because this eventuality is in fact already covered within the agreement. Of course there are risks involved. However, these are not in fact that great when compared to the losses that will have to be borne by the nation. Specifically for the Fujian contract, said Kurtubi, Indonesia will only face a maximum penalty of US$300 million (around Rp2.8 trillion) if it does not supply the gas there. However, if the contract is cancelled, then Indonesia will be able to obtain additional revenues of at least US$3 billion per year.

China, said Kurtubi, could of course take Indonesia to international arbitration. However, he said he was convinced that it would not have the courage to do this. “The people of Indonesia are too important as a market for Chinese products,” added Kurtubi.

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THE current commotion over the Tangguh contract is after all not just related to economic concerns. The ramifications of this problem have already extended to the political sphere. According to a Tempo source, who accompanied Vice President Jusuf Kalla on his trip to Beijing, the Tangguh contract will end up becoming ammunition if the Indonesian Democratic Party of Struggle (PDI-P) makes use of its enquiry rights as far as fuel is concerned.

This is because the DPR plenary session on June 24 this year in fact made the decision to permit enquiry rights as regards the Government’s policy to raise fuel prices. Together with several other political parties, PDI-P is one party that strongly supports the DPR investigating into this matter. In addition to the fuel increase policy, another matter that has been highlighted is the suspicion that some sort of mafia organization is involved in oil imports.

Alvin Lie, a DPR member from the National Mandate Party (PAN) faction, acknowledged that the Tangguh issue could also be a political issue for Kalla, who is also chairman of the Golkar Party, to use to shoot at Megawati. “It could certainly be an effective bargaining position.” Predictably, PDI-P politicians are becoming worried about Kalla’s statement.

Kebagusan—the PDI-P headquarters—certainly rejects the politicization of the Tangguh contract. Taufik Kiemas, who met with Tempo at Mega Dzikir in Jakarta last week, pointed out that the Tangguh contract agreement is the Government’s not an individual’s responsibility. “There is no way this can be linked to one particular party (PDI-P),” he said.

Similarly, PDI-P Secretary General Pramono Anung has also emphasized that the Tangguh contract cannot be linked to one party. The signing of this business contract was the responsibility of the Government, rather than the private responsibility of Megawati. If this were to be questioned, he said, Yudhoyono and Kalla were in fact also involved because they were assisting the President at that time. This graduate in Mining Technology from the Bandung Institute of Technology also called on Yudhoyono and Kalla not to seek the blame on the mistakes of previous governments.

Not wanting to be left out, Mukhlis Hasyim, a member of the Vice President’s special staff, also said he was convinced that there was no political motive behind Kalla’s request to renegotiate the Tangguh gas contract. “His motives are only the economic consideration and the interests of the nation, because the total value of the Tangguh field is huge,” Mukhlis told Tempo.

It is likely that this problem could snowball in the future. In addition to the struggle over inquiry rights, the general election is not that far away. This problem might end up becoming ammunition for the Golkar or the Democrat parties to attack the Indonesian Democratic Party of Struggle (PDI-P). And eventually this could also end up becoming a factor in the presidential race between Yudhoyono and Megawati.

Tangguh LNG field:

Buyers    Contract Length    Price*
Fujian (China)    25 years    3.35
SK Power (Korea)    20 years    3.5
SK Posco (Korea)    20 years    3.36
West Coast (USA)    20 years    5.94
Arun LNG:       
Japan    40 years    16
Badak LNG:       
Japan    20 years    17

From China, To China

Vice President Jusuf Kalla seems bent on criticizing the Tangguh project. This year alone, Kalla has said in public that the sale of natural gas (LNG) from the fields in Papua’s Bintuni region to China’s Fujian province do not benefit the nation. Kalla feels the price of US$3.3 per mmBtu is far below what it should be. “This contract is really loss-making,” he said, after he met with China’s Vice President Xi Jinping in Beijing, last week.

End of 2001

Indonesia, though BP Marketing Ltd. (BP Indonesia) and supported by Pertamina, offered LNG to Guangdong province in China.

August 2002

Australia, through the North West Shelf, beat Indonesia in the Guangdong tender, which was worth US$25 billion. The Australian contractor is a joint venture between Woodside, the Royal Dutch/Shell Group, ChevronTexaco Corp., BHP Billiton, BP and Japan Australia LNG.

August 8, 2002

China’s Foreign Minister Zhu Rongji appoints Indonesia directly as the supplier of LNG to Fujian province, amounting to 2.6 million tons per year for 25 years.

September 24, 2002

Pertamina signs a sales contract with CNOOC to send gas to Fujian. There were rumors that the sale price was only US$2.4 per mmBtu.

September 27, 2002

CNOOC agrees to purchase BP Plc’s 12.5 percent share BP Plc in the Tangguh gas field, worth US$275 million. This was a follow-up to the gas sale to Fujian. The first shipment was scheduled for 2007.

September 30, 2002

Energy Minister Purnomo Yusgiantoro denies the sale price of gas from Tangguh to Fujian was lower than Australia’s sales price of gas to Guangdong.

October 24, 2002

BP Migas acknowledges that the sale price of liquefied natural gas to Fujian was US$2.4 per mmBtu. This price was considered to be higher compared to the tender in Guangdong by using the Japan crude cocktail (JCC) price formula amounting to US$20 per barrel.

August 9, 2004

The Tangguh Project Special Review Team sumits three options on the purchasers’ request that the Government pay compensation amounting to a maximum of US$300 million. This was if there were breakdowns in the supply chain as a result of new government policies, also referred to as a government act.

First, the government act clause does not need to be regulated in the principles of agreement. This is not unusual in terms of being included in an upstream oil and gas enterprise contract. Second, the government act clause was included in the agreement, but limited to emergency conditions or force majeure. Third, the

government act clause included in the agreement states that the government or BP Migas would be fully responsible—with certain limits—over obligations arising as a result of new policies.

March 2005

After a long consideration, the government agrees to pay penalties if LNG

shipments are disrupted as a result of government policy. Claims would be handled first by the contractor.

December 9, 2005

BP Indonesia renegotiates with the government of Fujian regarding contract materials. There were no significant results.

January 20, 2006

BP Migas carries out renegotiations because the price of US$2.4 per mmBtu was too low. CNOOC is prepared to increase the gas sales price, but BP Migas has not yet accepted the figure offered.

End of 2006

The sale price of gas from Tangguh to Fujian is revised to US$3.3 per mmBtu.

March 6, 2008

Vice President Jusuf Kalla requests that the sale price of Tangguh gas be revised in order to be in line with fluctuations in global gas prices. The current contract is not considered to benefit the nation because it is so low and is in the form of a fixed price. This request was made when he met with the UK Special Envoy for Trade and Investment, Prince Andrew.

August 24, 2008