The renegotiated deal struck with the China National Offshore Oil Corporation effectively raises the price paid for gas sent to China’s Fujian province from the current $3.3 per million metric British thermal units to $8 per mmbtu, and will further increase in future along with crude oil prices.
T he government had initially hoped for a formula, which would see a current price of $10 per mmbtu, because natural gas currently sells for between $9.5 and $13 per mmbtu on the domestic market.
The contract between the Indonesian government and CNOOC was signed in 2002, but allows for renegotiations every four years if crude oil prices increase significantly.
Indonesia initially signed a commitment to supply 2.6 million mmbtu of natural gas per year for 20 years. The pricing formula in the 2002 contract was based on a fixed price of $25 per unit of gas equal to one barrel of crude oil.
That rate was negotiated up to $38 per barrel in the 2006 contract, which meant LNG was being sold at an average price of $3.35 per mmbtu from $2.60 per mmbtu earlier.
But in 2014 that price was still very low by both international and domestic standards.
The renegotiated contract solves the problem by adopting a different approach. The price of gas sold is now set as a ratio of 0.055 of the cost of Japan Customs-cleared Crude, a common measure used in LNG deals and nicknamed the “Japanese Crude Cocktail” (JCC).
“The Tangguh gas price increased significantly and it’s not fixed, meaning that it will follow world gas prices. This is good news for the future government,” Jero told reporters at the Presidential Office on Monday.
Jero said under the per-barrel formula agreed in 2002, the government would rake in an average of Rp 3.1 trillion per year until 2034. However, with the new JCC price formula, income should jump to an average Rp 12.5 trillion per year.
President Susilo Bambang Yudhoyono welcomed the price increase.
“If we can realize it this year, the state’s income will jump by almost 400 percent, which is a fairer deal for us,” Yudhoyono said during a cabinet meeting with the economic ministers.
The president said the government had been lobbying to increase the price and saw the opportunity in 2012 when he met with then Chinese Prime Minister Wen Jiabao and former President Hu Jintao.
“Indonesia doesn’t want to be on the losing side. It’s true that a contract is a contract, but there’s always room for negotiations and that’s what we did,” Yudhoyono said.
Pri Agung Rakhmanto, executive director of resource industry think-tank ReforMiner, praised the government for the new deal. “If you compare it with the previous price, then you’ll see it’s a significant increase,” he said.
Still, Pri called on the government to be fully transparent on the new price formula so that the public can directly monitor the amount of state revenue generated.