China may pay more for gas of Indonesia
(Shenzhen Daily/Agencies)
Updated: 2006-02-14 14:28

China may allow Indonesia to raise the price of liquefied natural gas (LNG) from the US$5 billion, BP-led Tangguh project, but the world's second-largest energy consumer ruled out any major increases.

"We understand the global LNG market has recently shifted to a seller's market from a buyer's market," said an official at China National Offshore Oil Corp. (CNOOC Group), which inked a deal in 2002 to import 2.6 million tons a year from Tangguh over 25 years.

The Tangguh agreement leaves room for further price negotiations, he said.

"We are negotiating. But producers should not over-estimate the affordability of a developing country like China," the official, who asked not to be identified, said.

The remarks are yet another signal from China, where cheap but dirty coal dominates energy consumption, that it is not ready to pursue environmental ideals by promoting the use of cleaner-burning LNG at any cost.

It also means oil companies counting on Asian demand for their gas reserves may have to look elsewhere. Some industry experts have estimated China could import more than 20 million tons a year, a quarter of Japan and South Korea's current demand, by 2015 into around 10 terminals along its coast.

China has so far sealed just two long-term deals to import roughly 6 million tons of the super-cooled, compressed natural gas a year from Tangguh and Australia's North West Shelf.

CNOOC has already put on ice talks with U.S. major Chevron Corp. for long-term supplies from the Australian Gorgon project due to a disagreement over price. Instead, Gorgon has signed up Japanese and Indian companies recently.

"China may become a big LNG market, but it all depends on price," said the official at CNOOC, China's third-largest oil and gas producer.

CNOOC Group is the parent of Hong Kong and New York-listed CNOOC Ltd., which holds a stake in Tangguh project.

Indonesia has asked CNOOC to raise the Tangguh LNG price to reflect recent climbs in LNG prices as a result of sharply higher global crude oil prices.

Kardaya Warnika, chairman of Indonesia's oil watchdog BPMIGAS told reporters last month that it wanted CNOOC to raise the price by hiking the oil ceiling prices from US$25 a barrel.

LNG prices in Asia are partly pegged to crude oil prices, which have more than doubled to more than US$61 a barrel over the past four years.

The CNOOC official said the Tangguh LNG price negotiation started last year, but he declined to reveal details of the talks or predict the outcome.

CNOOC has denied reports in December that its LNG terminal being built in China's southeastern Fujian Province wanted to receive only 1 million tons a year of Tangguh LNG in the short term instead of 2.6 million tons.

The official said construction of the Fujian terminal is proceeding normally.

He said it had yet to be proven if the tight global LNG supplies would last given that proposals to build dozens of receiving terminals in China and the United States had yet to materialize.

But it is almost unlikely for China to obtain future LNG supplies under the favorable terms secured for its first receiving terminal in Guangdong Province from North West Shelf in 2002 under a A$25 billion, 25-year deal, he said.

The Guangdong price is reportedly fixed around US$3.5 per million British thermal units regardless of oil price fluctuations.

"That was a great window of opportunity," the official said.