According to peakoil.com -> AsiaTimesOnline :

JAKARTA – A series of contractual production-sharing and long-term-supply spats pitting the Indonesian government against multinational energy companies and big natural-gas importers in Japan has recently tarnished Indonesia’s reputation as a reliable business partner. It has also undermined the gas sector’s overall earning potential – crucially at a time when global prices have surged to near-record highs.

Indonesia has some of the largest known pools of natural gas in the world, with total estimated reserves of 187 trillion standard cubic feet (scf), according to the Energy Ministry. Local gas production in 2006 amounted to 8.1 billion scf per day, of which 46% was dedicated to domestic demand for power generation, fertilizer production and other industries, while the rest was exported mainly as liquefied natural gas (LNG).

Significantly, Indonesia’s deep pools remain largely unexploited and rising global energy prices have substantially upped the market incentive to drop new wells. That’s apparently what French oil giant Total SA, currently one of Indonesia’s largest gas exporters, assumed when it announced last week plans to invest US$6 billion over the next five years in its existing operations at the Mahakam Delta oil-and-gas block in remote East Kalimantan province.

Yet no sooner had Total announced its investment plans when Mines and Energy Minister Purnomo Yusgiantoro said the government would likely seek to amend the company’s existing production-sharing contract, including the agreed 70%-30% government-contractor split over revenues, which is to expire in 2017. The minister said the amendments to the contract would seek “what’s best for Indonesia”.

Total has said in response that it sees no reason to amend its current contract, and that it expects to make a fair return on its new investments. Both sides are believed to be in behind-the-scenes negotiations, but if those break down, lawsuits are not out of the question. Total expects to earn $9 billion in profits from its Indonesian oil and gas operations this year.

Looking inward
Yet the government’s ham-fisted efforts to strike a balance between meeting domestic demand and fueling exports have alienated many foreign energy companies. For years LNG could not compete with oil-based fuels in the local market because of the government’s fuel-subsidy policy. Recent cuts in the oil subsidy have sparked new domestic demand for natural gas, which is expected to grow 6% this year.

Along with other producers such as Chevron, Total has been pressing for a government decision on better pricing for the gas it supplies domestically. Multinational producers are required to sell 25% of their gas draws to local companies, often at prices one-third lower than they would earn in global markets from processed LNG exports. That’s dampening multinational energy companies’ desire to invest in Indonesian gas fields when they may be forced by the government to supply local markets at lower prices than exported gas commands.

President Susilo Bambang Yudhoyono has promised to review regulations that could compensate producers for supplying more gas to the domestic market. “The government will consider various new fiscal incentives such as value-added tax and import duties, as well as tax reforms, to lure more investors to the country’s gas sector,” he told policymakers and industry leaders last week at the annual IndoGas conference in Jakarta.

But several high-profile cases where the government has pushed contract negotiations to the brink with various multinational oil-and-gas companies have raised serious concerns about the sanctity of contracts. Oil and gas deals signed by former authoritarian president Suharto almost invariably included a right for foreign energy companies to extend their contracts after exploration activities. Those deals, however, are gradually coming undone under Yudhoyono’s self-proclaimed business-friendly administration.

In 1995, the Suharto government granted US energy giant ExxonMobil 10 years to develop the oil and gas field at Natuna D-Alpha, and agreed it could retain 100% of the revenues it earned from eventual gas-production activities. ExxonMobil invested $400 million in exploring the block and reportedly discovered 46 trillion cubic feet of recoverable reserves, and total gas potential in the area is estimated at 80 trillion cubic feet. Its local partner, state-owned Pertamina, meanwhile, invested $60 million as a 24% minority partner in the public-private joint venture.

Jakarta last week terminated ExxonMobil’s 1995 production-sharing contract, which was up for renewal in 2005, and handed responsibility for development to Pertamina. ExxonMobil claims it complied with all requirements in the 1995 agreement, which included the reserved right to extend the contract twice for two-year periods.

ExxonMobil has had a particularly rough ride in Indonesia. A five-year dispute between the company and government over ownership and operating rights to the $2.6 billion Cepu oil-and-gas field in Central Java was only concluded last year through an adjusted production-sharing arrangement and Yudhoyono’s personal intervention. The provincial governments in Central and East Java, which had contested the company’s right to the resources, were given a 10% participating interest in the new deal.
Because of Cepu’s rich resources, including more than 2 billion barrels of potential oil reserves, which if efficiently tapped would increase Indonesia’s annual oil output by 18% and potentially push the country back to a net oil-exporting status, and about 11 trillion cubic feet of potential gas reserves, ExxonMobil accepted the amended terms rather than pulling out.

Unreliable supplies
For more than 25 years Indonesia, through Pertamina, dominated the region and led the global LNG market as the world’s largest exporter. But a number of nationalistic policy signals have recently alienated new foreign investors and inhibited the country’s ability to tap new supplies efficiently. Last year, Qatar bypassed Indonesia as the world’s largest LNG exporter.

This year the government has said it will slash LNG exports to traditional major buyers in Japan and South Korea (currently the world’s two largest LNG importers) and also to Taiwan from the contracted 26.4 million tons down to 21.4 million tons. Jakarta has also said it cannot guarantee a contractual extension to supply 12 million tons annually to Japan’s Kansai Electric Power, Chubu Electric, Kyushu Electric, Osaka Gas, Toho Gas and Nippon Steel Corp when the deal runs out in 2011. Tokyo Electric Power Co, Japan’s biggest electric utility, has recently said it will not renew its long-term agreement to purchase LNG from Indonesia when it expires in 2009.

Ironically, Indonesia’s two existing LNG plants at PT Arun in Aceh and PT Badak at East Kalimantan were built in the late 1970s under supply contracts with Japan. Natural gas is condensed at these facilities by refrigerating it to one-600th of its volume for shipment in tankers, and import terminals reverse the process, allowing gas to flow through pipelines. A third facility, at Tangguh in West Papua, currently operated by Anglo-American BP with Chinese and Japanese shareholders, is expected to come online next year and will be one of the world’s largest LNG projects, with a production capacity of 7.6 million tonnes a year from two separate units.

All of this sparring and backtracking with foreign investors and buyers significantly comes against the backdrop of Pertamina’s plans to list on the stock exchange by the end of next year and establish itself as a global energy player. Notoriously corrupt, Pertamina almost brought Indonesia to its knees in the 1990s by running up massive debts of more than $10.5 billion, or some 30% of gross domestic product. Change is in the cards, however, and the government recently hired international management consultants McKinsey & Co to improve the state concern’s corporate governance and accounting procedures.

President director Ari Soemarno, who was appointed last March after his predecessor’s uncompromising stance in negotiations with ExxonMobil over Cepu, said last week that he is determined to transform Pertamina into a competitive, modern and respected company. Pertamina expects to earn $40 billion in revenue this year and hopes to double output in the next four years.

Currently up to 45% of its profits go back to the government as dividends. Regulatory uncertainty – particularly concerning Pertamina’s authority over the country’s oil and gas reserves – still cloud the company’s prospects. Oil and Gas Law No 22/2001 in October 2001 stripped Pertamina of its longtime monopoly over the national energy industry, giving control over oil and gas fields to the government. The state-run company is, however, still bidding to operate many of the richest areas as a production-sharing contractor with the government.

Yet for most of the country’s untapped reserves, Pertamina is not in a position financially or technically to go it alone. Industry analysts contend that the high carbon-dioxide levels of the natural-gas deposits discovered at Natuna D-Alpha would make it difficult for technically challenged Pertamina to extract efficiently. The same analysts say developing the Alpha B block would require upwards of $25 billion in capital investments – a sum beyond all local companies’ financial reach.

At the same time, the need to start exploration for new gas reserves and to commence production on proven sites is paramount for the sector’s viability. That said, many politically connected Indonesian operators are nonetheless pursuing a much larger stake in exploiting and delivering the country’s energy resources. In the gas sector, for example, Indonesia’s biggest publicly traded oil-and-gas company, PT Medco Energi Internasional Tbk (Medco), together with Pertamina, plans to build a new LNG facility at Sulawesi underpinned by proven gas reserves of 2.4 trillion cubic feet.

PT Bakrie & Brothers, Indonesia’s top conglomerate, which is controlled by the family of Aburizal Bakrie, the country’s welfare minister, was in July awarded a $1.26 billion tender from the regulator of the downstream oil-and-gas industry, BPH Migas, to build and operate a 115-kilometer gas pipeline linking East Kalimantan and Central Java. The tender, critics note, was awarded without a competitive bidding process.

The country’s proven gas reserves will last for 60 years at current production rates, and with global prices on the rise, LNG exports represent one of Indonesia’s biggest economic hopes. Major regional neighbors such as China and Japan share a common strategy to secure energy supply and reduce their dependence on Middle East oil imports. And there is a growing global premium on LNG as a cleaner-burning fuel source than oil or coal.

But by replacing proven, deep-pocketed multinational energy companies with less qualified local producers – as it appears the government is promoting through its increasingly nationalistic moves – Indonesia’s oil-and-gas industry and the entire economy seem destined to underperform.

- With Indonesia slashing exports to Japan, South Korea and Taiwan according to this article….South Korea is one of the biggest importer of Natural Gas in the world, they have serious implication if the LNG supply is distrupted in anyway. See also : Korea needs to Prepare for Global LNG War to understand the crisis. 5 years contract is considered short term contract compared to the 22 years contract that Singapore had signed with Indonesia for the PNG (Piped Natural Gas) In 2001, Indonesia began exporting 325 mmcfd to Singapore via sub-sea pipeline from West Natuna under a 22-year contract.

Will there be a change in the contract as the new presidency did to other multinational companies? Will we get to renew the contracts after it expires in 2022? Or will the supply be able to last that long factoring the increasing demand for Natural Gas in the world….

Be prepared.