Serono LNG Project, Central Sulawesi, Indonesia

The Serono LNG project situated on the coast of Indonesia near the town of Luwuk in Central Sulawesi is being carried out by PT LNG Energi Utama which is owned by Mitsubishi Corp (51%), PT Pertamina (29%) and PT Medco Energi Internasional (20%).

The gas to supply the LNG plant is being provided by the Serono-Toili gas field, in Central Sulawesi. The owners of the field, PT Pertamina (Persero) and PT Medco E&P Tomori Sulawesi, have signed a supply agreement for 20 years of 120mmcf/d for the LNG plant.

The gas supply agreement is subject to the approval of BP MIGAS, an Indonesian Government Agency for upstream oil and gas projects.

The LNG plant (single train) has been designed to handle two million tons of gas a year (the plant may eventually have a second train in a future expansion to double this to four million tons a year). Gas will also be supplied by the Pertamina-controlled Dongii, Matindok, Maleo-Raj and Minahaki fields.

Total gas reserves of all these fields approaches around 22 trillion cubic feet (reserves were certified by international independent consultants Gaffney, Cline and Associates in January 2003). The investment into the Serono LNG project is around
$1bn.

LNG PLANT CONSTRUCTION

Following a heads of agreement in the final quarter of 2005 the approvals and regulatory procedures for the new plant were in place by mid-2006. The engineering, procurement supply contract for the new LNG liquefaction facility was awarded to Mitsubishi Corporation in summer 2006 (contract worth $600m) and the construction work was due to begin in 2007.

Construction has been delayed until mid-2008 over a disagreement between the partners about gas supply prices. The new plant is now expected to be in operation by the end of the second quarter of 2011. The Indonesian Government has been urging the partners to continue with the construction.

GAS SUPPLY AGREEMENTS

The production of gas from the main Serono gas field for the LNG plant is expected to earn the Indonesian Government $6bn in revenue under the current 15-year production split scheme. The production split arrangement will give the government 85%, and the Serono block operator’s state oil and gas firm PT Pertamina and Medco Exploration and Production (E&P) will get 15%.

Because of Mitsubishi’s involvement it has been thought that Japan will be a major customer for the LNG produced by the plant. Currently Japan receives about 12 million tons of Indonesian gas a year but this agreement ends in 2010 (Indonesia’s total LNG exports a year currently is 24 million tons).

At this point Indonesia expects new contracts to only supply five million tons of LNG a year with a much larger proportion of the Indonesian gas supply going to the domestic market (for chemical feedstocks and power generation). In August 2007 the Japan-Indonesia Economic Partnership Agreement was signed guaranteeing three million tons of LNG a year after 2010 and with the two million tons from the new Serono plant this makes up the five million tons.

ADDTIONAL HOLDING

Mitsubishi already owns a 51% stake in the LNG project but in August 2007 Mitsubishi Corporation acquired an indirect 19.97% holding in another partner in the project PT Medco Energi Internasional.

Mitsubishi did this by partnering with Encore International Ltd who controls PT Energi Internasional.

Mitsubishi purchased 39.4% of a new company that will hold a direct 50.7% stake in Medco for $352m. The other 60.6% of the new company, which is called Encore Energy, is owned by Encore International, which is controlled by the Panigoro family of Indonesia.

This of course gives Mitsubishi more control of the Serono project tying the production volume to Japanese supply agreements (Japan has low interest rates at the moment allowing Japanese to invest more aggressively).