Donggi Senoro Asks Japanese Buyers to Extend Gas Sale Deadline

The Jakarta Globe, Reva Sasistiya, April 2, 2009

The PT Donggi Senoro LNG consortium is seeking an extension to the deadline for the signing of definitive gas sale agreements with Japanese buyers, as the project’s development remains uncertain following the government’s refusal to approve the provisional gas sale agreements.

The consortium, made up of state oil and gas firm PT Pertamina, Japan’s Mitsubishi Corp. and PT Medco Energi Internasional Tbk, via its subsidiary PT Medco E&P, submitted the extension proposals to the buyers on Wednesday, after it failed to reach a satisfactory resolution with the government on the provisional agreements, a Pertamina official said.

“We are optimistic that the Japanese buyers will consent to the extension,” Hari Karyuliarto, Pertamina’s vice president of LNG business, said on Thursday. “At same time, we are also making approaches to the government.”

The consortium had provisionally agreed in February to supply the two buyers, Japanese utilities Chubu Electric Power and Kansai Electric Power, with 1 million tons of gas a year each. The deals, worth a total of $7.7 billion, envisaged the supplying of 335 million standard cubic feet of LNG per day over the course of the next 15 years.

According to Medco’s president director, Lukman Mahfoedz, the Japanese buyers had unofficially signaled their consent to the extension.

The Donggi Senoro LNG plant, located in Central Sulawesi Province, was initially set to start production in 2010, but the government recently delayed the project and approval for the provisional gas sales agreements by making them contingent on a number of preconditions.

The preconditions included acceptance of a government-set minimum floor price for the gas, the resolution of a legal dispute between Mitsubisihi and PT LNG Energi Utama, agreement on the domestic market obligation, a revision of the development plan for the plant, and approval for the gas sales by the upstream oil and gas regulator BPMigas.

The price payable by the two Japanese buyers under the provisional sale agreements is based on the Japan Customs-Cleared Crude price, known as the Japan Crude Cocktail, which is designed to allow LNG prices to fluctuate along with crude oil prices. As things stand at the moment, the agreements do not provide for an absolute minimum price for the Senoro gas.

Raden Priyono, chairman of BPMigas, said last month that the government would set a minimum floor price that would kick in if crude prices fell to $40 a barrel or less.

The floor-price proposal came in response to conclusions arrived at in February by a special committee of the House of Representatives on irregularities in the oil and gas sector, which suggested revising the pricing formula for the Senoro block to prevent prices from drifting too low.

The outstanding dispute between Mitsubishi and LNG Energi Utama began last August, when Jakarta-based Energi Utama sued Mitsubishi, demanding more than $709 million in damages and accusing the Japanese company of stealing confidential data to calculate production costs and service fees for the purpose of winning a storage-plant contract. Energi Utama also claimed it had exclusive rights to the Senoro project.

The delay, however, could have wider implications. Japan’s ambassador to Indonesia, Kojiro Shiojiri, sent a letter to President Susilo Bambang Yudhoyono on March 19, warning that if the project fell through, it would not only affect cooperation in the energy sector, but overall Japanese-Indonesian investment relations.

Energy and Mineral Resources Minister Purnomo Yusgiantoro said on Monday that some of the Donggi Senoro gas would be allocated to feed domestic fertilizer plants.