Indonesia Approves Chevron's $7 Billion Gas Project

By Bambang Dwi Djanuarto and Leony Aurora

Sept. 4 (Bloomberg) -- Chevron Corp., the second-largest U.S. oil company, won approval for a $7 billion project from the Indonesian government to pump natural gas in the southeast Asian country's first deep-sea drilling venture.

Chevron and Rome-based Eni SpA may spend $2.19 billion on development wells and the rest to build a floating processing unit and other facilities, Edy Hermantoro, upstream director at the energy ministry, said by telephone today. Energy Minister Purnomo Yusgiantoro signed the approval Aug. 29, he said.

The project would boost supply to a liquefied natural gas plant at Bontang in East Kalimantan province and may allow the world's third-biggest exporter of LNG to sell more of the fuel overseas than initially planned. The field may pump close to 1 billion cubic feet a day of gas at its peak, equivalent to 13 percent of Indonesia's current output.

``It's pretty expensive gas to produce'' as Chevron will have to drill on the seabed that's about 3,000 feet (914 meters) deep, said Andy Flower, an industry consultant and a former executive at BP Plc's LNG business.

Production of 1 billion cubic feet a day is equivalent to about 6 million tons of LNG a year, Flower said.

PT Pertamina, Indonesia's state-run oil company, estimates LNG shipments to a group of Japanese utilities will fall by 75 percent to 3 million tons a year after current contracts expire by March 2011, as output from some existing fields drops and fuel is allocated to local buyers.

LNG Exports

``Most of the LNG produced from the gas from these fields will be exported,'' Hermantoro said. ``We will allocate at least 25 percent of the output for the domestic market.''

Indonesia wants to boost LNG exports to benefit from rising LNG prices, which have doubled in the last three years as the price of crude oil surged to a record.

Korea Gas Corp., the world's biggest buyer of liquefied natural gas, has agreed to pay $20 per million British thermal units, based on a Japan Crude Cocktail oil price of $120 a barrel, for LNG supplied by the Tangguh project in Papua, Eddy Purwanto, deputy of operations at BPMigas, said on July 23. Korea Gas may buy ``nearly'' 1 million tons a year of the fuel that was initially earmarked for Sempra Energy's terminal in Mexico.

``We're looking at a sellers market out to 2015 and beyond'' where demand will outstrip supply, Flower said. ``There's a lot of potential demand in Asia.''

It will take six to eight years to develop the fields before they can start pumping gas, Steve Green, managing director of Chevron's IndoAsia Business Unit, said in a May 28 interview. At that rate, production may start by 2016.

No Word

Chevron said it hasn't yet had word from Indonesian authorities that the venture can proceed.

``Chevron is waiting on the official government approval of the Gehem-Gendalo deepwater gas project,'' Santi Manuhutu, spokeswoman for Chevron's Indonesian and Philippine operations, said in an e-mailed statement today.

Chevron owns an 80 percent stake in the Ganal area, where the Gehem and Gendalo fields lie, and Eni SpA the rest.

LNG is natural gas that has been cooled for transport by ship. Import terminals return the fuel to gas form so that it can be sent through pipelines to customers such as factories, power stations and households.

To contact the reporters on this story: Leony Aurora in Jakarta at laurora@bloomberg.net; Bambang Dwi Djanuarto in Jakarta at bbjakarta@bloomberg.net.