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NEWS UPDATES 10 August 2009

Japanese firm ends deal to buy LNG from Indonesian plant

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Japan's Kansai Electric Power Co. Inc. has officially cancelled its plan to buy liquefied natural gas (LNG) from the Donggi-Senoro plant in Central Sulawesi, the company says in a statement, reported the Jakarta Post.

In a letter dated August 4, 2009, Kansai president and director Shosuke Mori notified PT Donggi-Senoro LNG, a joint venture company prepared to build and operate the plant, that the buyer had terminated the LNG sale and purchase head of agreement (HoA).

Mori pointed out the HoA had been extended several times, with the latest extension stipulating the contract's conditions and precedents (CPs) must be satisfied by the end of July.

"However, this cutoff point has passed and neither have the CPs been satisfied nor have the parties mutually agreed in writing upon a later alternative date for satisfaction of the CPs," Mori said in the letter, a copy of which was obtained by The Jakarta Post.

"Under these circumstances, the buyer hereby notifies the seller that the buyer terminates the HoA." Kansai's decision to terminate the HoA comes in the wake of the government's toughened stance forbidding gas exports from the two gas fields of Matindok and Senoro in Central Sulawesi - which are supposed to supply the gas to the LNG plant.

State oil and gas company PT Pertamina owns 100 percent of the Matindok field, which is estimated to hold 0.6 trillion cubic feet (TCF) of gas reserves. The Senoro field, with estimated gas reserves of between 1.42 TCF and 1.76 TCF, is equally owned by Pertamina and PT Medco Energi Internasional.

Pertamina and Medco then invited Japan's Mitsubishi Corporation to establish PT Donggi-Senoro LNG. Pertamina holds a 29 percent participating stake in the venture, while PT Medco Energi Internasional holds 20 percent and Mitsubishi Corporation holds a controlling 51 percent share.

The consortium estimates the LNG plant will require about US$2 billion in investment. The consortium signed by the end of February the HoA with Kansai and Chubu Power Co. Inc., stipulating that each company would be supplied with 1 million tons of LNG per year from the plant for 12 years, starting from 2012.

However, the contracts and project have been left in limbo, after Vice President Jusuf Kalla announced in mid-June that gas from the Senoro and Matindok fields, intended to supply the plant, would have to be sold domestically instead.

The consortium argued that in order to make the project economically feasible, at least 335 million standard cubic feet per day (MMSCFD) of gas from the two fields had to be supplied to the Donggi-Senoro LNG plant, which had agreed to buy the gas at $6.16 per British thermal unit (BTU).

Neither Pertamina nor Medco have commented yet on Kansai's decision to terminate what would have been a highly lucrative contract. However, in an earlier interview, Pertamina's head of LNG business, Hari Karyuliarto, said that because the HoA had expired, the buyers could terminate the contracts at any time.

The other buyer, Chubu, has not yet announced what steps it will take. Energy and Mineral Resources Minister Purnomo Yusgiantoro said the government might discuss the Donggi-Senoro issue once again at a Cabinet meeting.

However, he was quick to point out that officially the government's stance on the issue remained the same. "The consortium should try once again to find domestic buyers that can afford to buy the gas at prices that meet the project's economic viability," Purnomo said.



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