20 September 2010

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Post-LNG Arun: What are the options?

The Arun LNG facility has been an important contributor to the positive balance of Indonesia’s national natural gas/LNG trade. Arun (Lhokseumawe, Nanggroe Aceh Darussalam) has made noticeable contributions to the national and local economy for more than three decades.
Arun’s production coupled with output from Bontang LNG (East Kalimantan) made Indonesia the world’s largest exporter of LNG for more than two decades, during which time LNG has been a major contributor to export earnings and government revenues.

The LNG landscape lies in stark contrast to the potential of Indonesia’s oil trade, where crude exports continue enduring a steady decline while import of crude and petroleum products continue to rise.
Indonesia’s natural gas industry is in a much more lucrative position simply based on the fact that Indonesia does not import natural gas, while domestic industrial demand for the commodity is on the ascendancy.
The value of Indonesia’s natural gas exports (mainly LNG from Arun and Bontang) over the last five years has ranged from US$9.1-$13.2 billion per year. Their annual contribution to the central government for the same period has ranged from Rp 31 to Rp 42 trillion ($ 3.48 — $4.72 billion).
Arun’s gas potential was discovered in 1971. There were several development options during the early Arun period. One proposal suggested sending Arun’s LNG to California.
A second plan was to avoid investment in liquefaction facilities by constructing a transmission pipeline to feed Singaporean demand instead. A third prospect involved shipments of Arun LNG directly to Japan.
The third option was finally selected. The first stage of the liquefaction plant cost about $ 1 billion. Arun sent its first LNG cargo to Japan in October 1978, followed by later supply contracts with South Korea and Taiwan.
Other gas-based industries developed around Arun, including two leading domestic fertilizer plants, AAF (Asean Aceh Fertilizer) and Iskandar Muda.
The multiplier effect on the local economy, including revenues to the local government, has been significant, particularly after fiscal rebalancing between central and local governments was implemented in the early 2000s.
The sad news is that the huge Arun LNG liquefaction plant (six train capacity with four operational trains currently producing 6.5 million tons per annum/MTPA) will terminate operations in 2014.
Declining production from the current gas fields and expiration of major LNG sales contracts are the main reasons for scaling down the plant’s operations.
Declining gas production has impacted some fertilizer plants, which have faced temporary shut downs because of deficient gas supply after the limited Arun supply was prioritized to feed long term contracts with overseas buyers.
Three years does not leave a comfortable time frame to build new infrastructure or prepare for a post industry transformation. Given the potential impacts, pre-2014 planning must comprehensively analyze the impact of Arun’s decline on the local economy.
The termination of Arun LNG plant operations is not only a shareholder concern  (ExxonMobil, Pertamina and Japanese buyers), but will also impact many other stakeholders.
The industry’s benefit to the local economy, as well as its large influence on socio-political conditions, will hopefully invite attention from wider stakeholders, including the local and central government and the associated ministries (industry, energy, etc). They all need to share responsibility for Arun post-2014.
Indonesians still remember that Acehnese suffered mistreatment in the past, some of which was blamed on the management of the natural gas industry.
Post-LNG Arun not only concerns matters of whether the current LNG liquefaction activities should be converted, for instance, to an LNG receiving terminal, but it also has to take political concerns into  more serious account, particularly issues of fairness in the distribution of revenues and the accommodation of local interests.
The current LNG liquefaction plant facilities are still in working condition, as are the other gas-based plants nearby (fertilizer, petrochemical, etc.).
Several options might be proposed, but utilizing the existing facilities should be set as a top priority. Connecting the post-2014 strategy with other national projects should also be prioritized.
The LNG storage, power generators and other gas-based industries in Aceh might continue to operate if gas supply is secured. Constructing a new LNG receiving terminal at the current Arun LNG location to facilitate the import of LNG from other liquefaction plants in Indonesia (Tangguh, Donggi-Senoro or Bontang) could be a possible solution to the gas supply problem.
The other large storage facilities (LPG, condensate) can be used as transit terminals to address local LPG demand, or if necessary, for storage of CPO (crude palm oil) from plantations in northern
Electricity (which could be supplied from power generators available at the gas industry estate) could meet local demand and be further connected to the trans-Sumatra transmission grid presently under construction.
Maintaining the current fertilizer production by feeding sufficient gas is essential for regional food security, as is the case of electricity provision. They both support wider national interests.
Whatever options taken, the planning and preparation for Arun post-2014 should begin now to avoid “sudden shock”, as has happened in the aftermath of mining, industry and trade agreements that were not appropriately anticipated.

Hanan Nugroho, The writer is a senior energy planner and an economist with the National Development Planning Agency. The opinions expressed are his own.

Opini The Jakarta Post 21 Sept 2010