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August 31, 2008

Indonesia to rebargain gas deal with China
Indonesian government plans to let a high-powered team renegotiate the 2002 gas export deal from Tangguh field to China will start work in October to resolve the issue before the scheduled first shipment early next year, local newspaper the Jakarta Post reported.

"We expect that it will start effective this October," State Minister of National Development Planning Paskah Suzetta said on Friday.

The forming of the team was announced by President Susilo Bambang Yudhoyono Thursday as a response to long discussions over the controversial liquefied natural gas (LNG) selling price.

The team will be led by the Coordinating Minister for the Economy, Sri Mulyani Indrawati, under the direct supervision of Vice President Jusuf Kalla.

Kalla was the one who helped initiate the idea to renegotiate the contract, calling it the country's most devastating contract ever made, as the selling price was not tied to the movement of oil prices, a method commonly used in gas deals.

Under the contract, the price of LNG was pegged at $2.4 per million British thermal units (mmbtu) regardless of any increase in crude oil prices.

Even though the Chinese government already agreed to raise the price to $3.8 per mmbtu, Kalla believed the 25-year contract, signed during the Megawati's administration, would lead Indonesia to massive losses once
the export would begin next year.

The potential loss is predicted to be enormous as global LNG prices now hover at around $20 per mmbtu.

Energy analyst Kurtubi has recommended the government to annul the contract, even if the government must pay $300 million in penalties as a result.

"It is far less than the billions of rupiah in losses that we have to take for the next 25 years," he said as quoted by Antara.

Under the contract, Indonesia will deliver 2.6 million tons of LNG annually to China's Fujian province from the LNG plant in Tangguh, Papua.

Operated by Europe's largest oil and gas company BP Plc., the Tangguh plant is expected to produce 7 million tons per annum in the first phase of production scheduled in 2009. Gas fields, which will feed the
plant, have proven reserves of 14.4 trillion cubic feet.

The gas buyers include the United States company Sempra Energy LNG Corp., South Korea's steel maker POSCO and power firm K. Power.

Korea Gas Corp. has recently expressed interest in buying gas from Tangguh at a price of $20 per mmbtu.

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