CHINA’S MNC ENERGY IN INDONESIA CASE STUDY: CNOOC IN TANGGUH-FUJIAN LNG PROJECT (2009-2012)

An Undergraduate Thesis

Submitted to the Faculty of Social and Political Sciences In Partial Fulfillment of the Requirements for Bachelor of Arts (B.A) in International Relations

By: Faruq Muhandis

108083100014

DEPARTMENT OF INTERNATIONAL RELATIONS FACULTY OF SOCIAL AND POLITICAL SCIENCES SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY JAKARTA 2014/1436

DECLARATION OF ORIGINALITY

This thesis entitled:

CHINA’S MNC ENERGY IN INDONESIA CASE STUDY: CNOOC IN TANGGUH-FUJIAN LNG PROJECT (2009-2012)

1. Is my original work proposed to fulfill one of requirements to obtain undergraduate degree in Syarif Hidayatullah State Islamic University Jakarta.

2. All sources used in this thesis I have attached according to the rules applied in Syarif Hidayatullah State Islamic University Jakarta.

3. If this thesis is afterwards found not as my original work or recognized as plagiarize from other’s work, I agree to take all the responsibilities and penalties applied by Syarif Hidayatullah State Islamic University Jakarta.

Jakarta, 10 November 2014

Faruq Muhandis

ii

THESIS ADVISOR RECOMMENDATION LETTER

Thesis advisor hereby declares that the student:

Name : Faruq Muhandis Student No. : 108083100014 Major : International Relations

Has finished the undergraduate thesis entitled:

CHINA’S MNC ENERGY IN INDONESIA CASE STUDY: CNOOC IN TANGGUH-FUJIAN LNG PROJECT (2009-2012)

And fulfill requirement to be examined.

Jakarta, 31 September 2014

Acknowledged by, Approved by, Head of Department Thesis Advisor

Debby Affianty, M.A. Taufiq Rahman, M.A.

iii

PANEL OF EXAMINER APPROVAL SHEET

THESIS CHINA’S MNC ENERGY IN INDONESIA CASE STUDY: CNOOC IN TANGGUH-FUJIAN LNG PROJECT (2009-2012)

by Faruq Muhandis 108083100014

Has been defensed in thesis oral defense in the Faculty of Social and Political Sciences of State Islamic University Syarif Hidayatullah Jakarta on 10 November 2014. This thesis was assessed and approved as partial fulfillment of the requirements for Bachelor of Arts (B.A.) in International Relations.

Head, Secretary,

Debbie Affianty, M.A. Agus Nilmada Azmi, M.Si. NIP : 197808042009121002

Examiner I, Examiner II,

Ahmad Alfajri, M.A. Febri Dirgantara Hasibuan, S.E., M.M.

Head of Department Faculty of Social and Political Sciences

Debby Affianty, M.A.

iv

ABSTRACT

The increasing of gas demand in China is an implication of China’s policy on promoting natural gas use. This policy has objective in order to improve energy diversification, energy efficiency, and as a solution to environmental problems. With this condition, China needed to import gas from foreign countries to supply gas demand due to lack of gas resources energy in China, particularly in the coastal region. Indonesia is one of countries which determined by China to supply gas demand in China. The gas cooperation between China and Indonesia is started in convening bidding for Guangdong LNG terminal supply in November 2001 which is held in China. It is the first time for China entered global gas market. China decided Indonesia as a winner of a consolation prize with 2.6mtpa for 25 years of LNG to Fujian LNG terminal. With this cooperation, this research explained factors that influenced China’s policy to import gas from foreign countries and determined Indonesia as a supplier LNG for Fujian LNG terminal in 2002. This research used framework or concept of national interest, foreign policy, internal and external factors, and resource diplomacy. Based on analysis, this research has resulted two internal factors and three external factors that influenced China’s policy on importing gas from Indonesia. Two internal factors are the rising of China’s economic and gas demand in China’s coastal region. Three external factors are Indonesia gas supply, Indonesia gas price, and the ability to transfer gas to China.

Keywords : China, CNOOC, gas cooperation, energy security, energy diplomacy, Tangguh plant, Indonesia

v

PREFACE

Praise to Allah SWT for all His gifts, His protection, His power, His mercy and guidance given to me so I can finish the final task of this thesis.

Sholawat and salam for the Prophet Muhammad SAW who has delivered the holy Quran to mankind and to save mankind from moral decay.

To complete the final task of this thesis the author has worked hard all his strength, but the author is well aware that this thesis would not have materialized without the help of various parties, both morally and materially. Therefore, it is fitting that the author expressed the highest appreciation to:

1. Debby Affianty, M.A., The Head of International Relation Department of

Faculty of Social and Political Sciences Syarif Hidayatullah State Islamic

University (UIN), which has provided instructions and guidance to the author

for completion of proposal thesis.

2. Taufiq Rahman, M.A., as thesis advisor which is always patient and sincerely

provide guidance until the completion of this thesis.

3. All Lecturers in International Relations Department, especially Mr.

Nazaruddin Nasution, M.A., as academic advisor.

4. Especially for beloved abi Drs. H. Muhammad Alwi (alm.) And dear umi Hj.

Mimim Hamimah, S.Pd.I and grandfather K.H. Ahmad Jaelani HR and

Hambali (alm.) also my grandmother Hj. Mukhifah and Siti Aisyah (almh.),

who have never stopped to love, encourage and support me and the children.

Thank you all for always company me in this process. Thank you for waiting

vi

me patiently to finish my awesome undergraduate program. There is nothing

can replace all of their love. I hope Allah repay with blessing of them.

5. My brothers Fuadi Vairuz, S.Pd.I., Fadil Hilman, Fathan Muzayyan, and my

sister Faradina Alwi who have been together in times of happiness and

sadness. We walk together for gaining our success.

6. My thanks to classmate friends in International Class (cohort 2, 2008), Haryo

dewanto (bebew), Akbar Fitriyasa (abai), Fajar Fiqh (Jay), Mazhar Sandy

Priagung, Muhammad Q Rusydan, Noviar Nurdiansyah (alm), Asep Zulhijar,

Nadia Ayu Safitri, Rizkika Adi Rahmawati, Yurizka, Arrum, Festy, Seruni,

Ita, Chika, Dhea, and Asri. No inspiration without you guys. The author also

thanks to senior and junior IRs International family from 2007-2011 who has

made this university environment special and unforgetable.

7. My special thanks to my special women, Novira ellentina as the best

companion ever. Thanks for all your motivation and your patient on waiting

for my research and graduation.

May Allah reward and bestow His mercy and grace for all the help and support given. The author is fully aware that this thesis is still far from perfection due to the limited knowledge and experience of the author. At the end, the authors greatly appreciate suggestions and constructive criticism from all sides. Final word with all humility, the authors dedicate this paper to all interested parties with the hope that this paper can be useful as it should.

Jakarta, 9 Oktober 2014 Author

Faruq Muhandis

vii

TABLE OF CONTENTS

ABSTRACT ……………………………………………………………………....v

PREFACE ………………………………………………………………………..vi

TABLE OF CONTENTS ……………………………………………………….viii

LIST OF TABLES AND FIGURES ……………………………………………..x

GLOSSARY ……………………………………………………………………...xi

CHAPTER I INTRODUCTION

A. Background ……………………………………….1

B. Research Question ………………………………...7

C. Research Objectives ………………………………7

D. Literature Review …………………………………7

E. Theoretical Framework ………………………….10

F. Research Methods ………...……………………..14

G. Research Outline ………………………………...15

CHAPTER II China’s Gas Security and Policy

A. China’s Gas Security …………………………….17

B. China’s Gas Policy ………………………………20

CHAPTER II I Cooperation of China and Indonesia in Gas

A. Overview of China and Indonesia Relations ...…..23

B. Indonesia and China Energy Forum (ICEF) …….27

C. China-Indonesia Gas Cooperation ...….………....29

viii

CHAPTER IV Factors that Influence China’s Policy on Importing Gas from Indonesia

A. Internal/Domestic Factors ………………………….35

1. Rising of China’s Economic …………..………….35

2. Gas Demand in Chinese Coastal Region ...………..39

B. External Factors …………………………………….45

1. A Stable Gas Supply in Indonesia ..……………….45

2. Affordable Gas Price ……………..……………….46

3. Ability to Transfer LNG to Fujian China …………50

CHAPTER V CONCLUSION …………………………………………54

REFERENCES …………………………………………………………………..57

ix

LIST OF TABLES AND FIGURE

Table 1 : China Economic Growth and Total of Gas Production and

Consumption since 2000 -2012 ..…...…………………………………2

Table 2 : A comparison of emission growth rates for the world and China 1971-2005 ...…………...... 39 Table 3 : Primary Energy Consumption in the Coastal Regions .…………….41 Table 4 : Primary Energy Consumption in Inland Regions …….……………42

Table 5 : Supply, Demand and Import Balance: 2005-2020 ……..…………..44

Figure 1 : China LNG import sources, 2011 ……………………………..…….4

Figure 2 : China’s natural gas production and consumption, 2000-2011 ...... …37

x

GLOSSARY

BCF Billion cubic feet

BCM Billion cubic meters

BOE Barrels of oil equivalent

BPI British Petroleum Indonesia

BP MIGAS Badan Pelaksana Kegiatan Hulu Minyak dan Gas

BPH MIGAS Badan Pelaksana Kegiatan Hilir Minyak dan Gas

Btu British thermal units

CM Cubic meter

CNOOC China National Offshore Oil Corporation

CO 2 Carbon dioxide

ESDM Energy and Mineral Resources Ministry of Indonesia

IEA International Energy Agency

ICEF Indonesia China Energy Forum

JCC Japan Crude Cocktail

KWh Kilowatt hours

LNG Liquefied natural gas

LPG Liquefied petroleum gas

MCF Thousand cubic feet

MCM Thousand cubic meters

MMCM Million cubic meters

MMBtu Million British thermal units

MMSCFD Million standard cubic feet per day

xi

MMTCE Million tons of coal equivalent

MMTOE Million tons of oil equivalent

OECD Organization for Economic Cooperation and Development

PPP Purchasing Power Parity

SO2 Sulfur dioxide

SDPC State Development Planning Council

TCM Trillion cubic meters (1012 CM)

TCE Tons of coal equivalent

TOE Tons of oil equivalent

Units of Measure

Natural Gas

Volume

1 MCF (1,000 CF) = 28.32 cubic meters (CM)

1 BCM= 35.3 BCF = about 0.9 MM TOE = about 1.35 MMTCE

1 ton of LNG = 2.35 cubic meters of LNG = 1,400 CM of natural gas Energy

1 MMBtu (252,000 Kcal) = 28.32 CM

1 CM = about 9,000 Kcal

Energy and Power

1 kWh = 3,412 BTU = 860 Kcal

1 MW = 1,000 kW

1 GWh of electricity consumes approximately

250 tons of oil in an oil-fired conventional steam power plant

390 tons of coal in a coal-fired power plant

282,000 CM of natural gas in a combined-cycle power plant

xii

CHAPTER I

INTRODUCTION

A. BACKGROUND

By the early 21st century, China has become a country with a developed economy. China's rapid economic progress cannot be separated from the important role of the Chinese government. The Chinese government set economic reforms which followed by significant economic growth and sustainable industries. Economic reforms also have an impact on increasing the economic average growth of 5.8% in 1978 to 8.4% in 2000 and 14.2% in 2007.1

The increasing of economic growth and industrial growth which is achieved by China have caused the increasing of energy consumption, one of them is gas consumption. Since 2000-2012, China's domestic gas consumption has continued to increase. In 2000-2004, with GDP growth 9.14% gas consumption reached 376.031764 billion cubic feet / day. In 2004-2008, with

GDP growth 11.58% gas consumption reached 2,042.78206 billion cubic feet / day. In 2008-2012, with GDP growth 9.26% gas consumption reached

3,878.94508 billion cubic feet / day, this data can be seen in Table 1 below.

1 World Bank national accounts data, and OECD National Accounts data files, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, accesed on 22 Maret 2013,

1

Table 1. China Economic Growth and Total of Gas Production and

Consumption since 2000-20122

GDP Years Gas Production Bcf / day Gas Consumption Bcf / day Growth(%)

2000 – 2004 9.14% 1,167.2314 376.031764

2004 – 2008 11.58% 2,080.11002 2,042.78206

2008 – 2012 9.26% 3,290.20192 3,878.94508

Source: World Bank and U.S EIA

China’s formal natural gas production started in 1949 with a mere 16.71

mcm. Since then the production has been growing steadily, exceeding 100 mcm in

1962 and rising to 1.44 bcm in 1968. During 1968-1979, the annual production

growth rate was 23.4% and as a result production in 1979 reached 14.52 bcm.

Between 1980 and 1989, however, production was stagnating and in 1982 it even

declined to 11.93 bcm. It was only in 1989 that it returned to the level of 1979

(14.5 bcm). Since then China’s gas production has been steadily increasing, and in

1996 the figure reached at 20 bcm level for the first time and in 2001 the

production recorded 33 bcm.3 At the next years, the gas production is getting

continue increase along with the effort of China’s government to promote natural

gas use.

2 World Bank, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=1 and U.S Energy Information Administration, http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=53&aid=1&cid=CH,&syid=199 8&eyid=2012&unit=TBPD, accesed on Maret 24 2013, 3 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, p.12

2

This effort on promoting natural gas use is in order to improve energy diversification and energy efficiency, and as a solution to environmental problems. Although natural gas was still a relatively minor fuel in China’s energy mix, accounted for 3.5% share of total primary energy consumption (TPEC) in

2007, the government set the target of raising natural gas use to 10% of the energy mix in 2020. It is set under the 10th Five-Year Plan (2001-2005), which was basically reiterated in the 11th Five-Year Plan (2006-2010).4

These China's policy is inseparable from energy diversification, energy efficiency, and as a solution to environmental issue. With coal as the primary

China’s energy consumption, environmental problem became serious issue in

China. According to EIA in 1996, China was the third country in terms of CO2 emission in 1990 and has been the second one after the U.S since 1995. And according to the World Health Organization's report in 1994, there are three of ten most polluted world cities are located in China. They are Beijing, Shenyang in northeast China and Xiían in the western China. Environmental concerns are creating a pressure for the acceleration of natural gas supplies as a way to redress coal and oil burning emissions.5

Currently, China's gas supply is supported from domestic and from gas- producing countries in the world. Diversification of gas imports made China expected to maintain the stability of gas supply for domestic needs. The composition of China's gas supply from various countries can be seen in Figure 1.

4 Noboyuki, Hikashi . Natural Gas in China; Market evolution and strategy, iea, 2009. p.9 5 Xu, Xiaoujie. The Gas Dragon’s Rise: Chinese Natural Gas Strategy and Import Patterns, The Center for International Political Economy and The James A. Baker III Institute for Public Policy Rice University, 1999, P.4.

3

It showed that 60% of China's gas imports come from the South East region

(Australia, Indonesia and Malaysia), 28% from Middle East (Qatar, Yemen and

Egypt), 8% from Africa (Nigeria and Trinidad), 2% from Russia and 2% from other countries.

Figure 1. China LNG import sources, 20116

Others Russia Egypt 2% 2% 2% Trinidad 2%

Nigeria 6% Australia 30% Yemen 7%

Malaysia 13%

Indonesia 17% Qatar 19%

Source: US EIA

Most of China's gas supply is formed in LNG and channeled through the sea route such from Indonesia, Australia, Malaysia and Qatar. It is the most effective way in order to meet strong gas demand in China. According to Andrew

6 U.S Energy Information Administration, http://www.eia.gov/countries/cab.cfm?fips=CH, accessed on 01 April 2013.

4

S. Erickson and Gabriel B. Collins in paper titled Pipelines versus Sea Lanes :

Challenges and Opportunities for Securing Energy Resources, argued that pipelines are not likely to increase China’s gas import security in quantitative terms, because the additional volumes they bring in will be overwhelmed by

China’s demand growth which will grew over time, pipelines notwithstanding.

Pipelines are more vulnerable to sabotage and military interdiction than seaborne shipping is and Pipelines are vulnerable to weather and other physical disruptions.7

Currently, China has some LNG cooperation with other countries to meet the needs of the domestic gas supply, one with Indonesia. Indonesia has gas reserves ranked 14th worldwide and reserves reached 106 Trillion Cubic Feet in

2011.8 Indonesia is the third largest gas exporter after Qatar and Malaysia.9 China decided to cooperate with Indonesia as the supplier of gas for supplying gas from

Tangguh to Fujian China.10 And CNOOC started its expansion in Tangguh LNG plant in Indonesia as China’s state own company.

On September 27, 2002, CNOOC announced that it had signed a Heads of

Agreements (HOA) on acquiring a 12.5% stake in the Indonesian Tangguh LNG project by payment of US$275million from BP, which holds 49.66% of the project’s stake. It is worth nothing that CNOOC’s acquisition price for the

7 Erickson, Andrew S. and Gabriel B. Collins, Pipelines Versus Sea Lanes : Challenges and Opportunities for Securing Energy Resources. In the book titled China’s Energy Relations With Developing Countries, edited by Carrie Liu Currier and Mannochehr Dorraj. P. 178-179 8 U.S Energy Information Administration, http://www.eia.gov/countries/cab.cfm?fips=CH, accesed on 01 April 2013. 9 Ibid, accesed on 01 April 2013. 10 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, P.78

5

Tangguh project is around $0.89 per barrel of oil equivalent, well below

CNOOC’s average historical funding and development costs of around $4/BOE.

The Tangguh price is also lower than the company’s earlier acquisition of a 5% stake in Australia’s North West Shelf Gas Project reserves, which cost CNOOC

$320 million and translates to about $1.52 per BOE. The HOA signed in Jakarta confirmed a 25- year, $8.5bn Sales and Purchase Agreement on supplying 2.6m tonne/year of LNG to Fujian LNG project.11

The stakes of the Fujian terminal will be split only between CNOOC and the local government-backed FIDC at a ratio of 60%: 40%, which shuts potential foreign investors and local gas companies out of the door, and it is quite different from the Guangdong project. The executive office argued that they learned a lesson from the Guangdong project that too many voices in decision-making might be distracting.12

A noticeable fact with the Heads of Agreements (HOA) is that the 12.5% stake is larger than the 5% stake CNOOC got in the Northwestern Shelf through leveraging a 3m tonne/year gas contract for the Guangdong LNG terminal.

Another noteworthy fact is that the gas-supply volume is raised from the earlier reported 2.5m tonne/year to 2.6m tonne/year.13

Therefore, with the natural gas potential, cheap gas price and big acquisition of stakes in Tangguh plant Indonesia, and accessibility to transport gas in LNG formed from Tangguh Indonesia to Fujian China made CNOOC’s

11 Ibid, P.82 12 Ibid, P.83 13 Ibid, P.83

6 existence stronger in Indonesia with financed and built gas cooperation in

Tangguh Indonesia. The Cooperation will ensure gas supply from Tangguh

Indonesia to LNG terminal in Fujian China. At the end, this cooperation will greatly determine the security of gas supplies from Indonesia to China.

B. Research Question

Based on the background above, the research question can be drawn as the following: "Why did China import gas from Tangguh Indonesia (2009-

2012)?"

This research has range of time between 2009-2012 because 2009 is the first of the sending gas supply from Tangguh Indonesia to Fujian China and until

2012 is it marks a decade of bilateral energy forum between Indonesia and China namely Indonesia - China Energy Forum (ICEF) which was formed on March 24,

2002 in Beijing - China.

C. Research Objectives

The purposes of this paper are as follows:

1. To know the forms of energy gas security in China.

2. To know the forms of cooperation between China and Indonesia in gas.

3. To identify China’s policy in energy security.

4. To analyze the factors that influenced China’s policy to import gas from

foreign countries and determined Indonesia as a supplier LNG for Fujian LNG

terminal.

D. Literature Review

7

There are many literatures about the relation between China and Indonesia which included cooperation of energy between China and Indonesia, such as

‘Forging Closer Sino-Indonesia Economic Relations and Policy Suggestions’ written by Chongbo Wong for Ritsumeikan International Affairs Vol.10, pp.119-

142 (2011). Writer is a Professor of The Research School for Southeast Asian

Studies, Xiamen University, Xiamen, Fujian, PRC.

Wong in his research described that since the continuous of friendship between China and Indonesia in 1990, the relation has been strengthening and enhancing their cooperation to the energy cooperation besides political, cultural and trading cooperation. According to Wong, the basis for bilateral cooperation received a stronger impetus when, on april 25 2005, SBY and Chinese President

Hu Jintao signed an agreement to establish a “strategic partnership” between the two countries, laying the ground for a comprehensive cooperation on a wide range of issues, including energy, security, and defense. Wong tried to answer the research question of how the prospect of cooperation between Sino and

Indonesian economic.

In his research began with an overview of the key trends and characteristics of Sino-Indonesian Economic Relations, including bilateral trade, mutual investment, Chinese economic aid and export credit, as well as other areas of cooperation and exchanges are under way, and then touches on main reasons contributing to rapid Sino-Indonesian economic relations. It finally discusses the prospect for Sino-Indonesian economic and trade ties.

8

With the research above, researcher can compare the research with the research will be done. So, the different between the research and the research above is this research will be more focused on the why China cooperated with

Indonesia in gas. But in previous research, the research is more focused on the reasons that contributing to rapid Sino-Indonesian economic relations.

Second, ‘Ekspansi MNC China di Asia Tenggara Studi Kasus: PetroChina di Indonesia (2002-2008)’ written by R. Maisa Yudono for partial fulfillment of the requirements for obtaining Master of Sains (MSi) in Department of

International Relations Faculty of Social and Political Science, University of

Indonesia.

In his conclusion, Yudono described China and Indonesia have important role in the expansion of Petro-China in Indonesia. China supported oil and gas companies in the policy of energy 1990-2007 where the China’s state owned company is motivated to become major MNC particularly in international oil and gas industry. Indonesia has the important role in the opening of opportunity for national and international oil and gas industry as shown in the regulation of gas and oil 2001 and the regulation of investment 2007. Both of regulations showed the role of Indonesia in the opening of opportunity for international oil and gas industry to come in and plant investment in national gas and oil sector.

The research which will be done has several the same with the research above. Such as that China and Indonesia has the important role of the expansion of China’s gas and oil companies in Indonesia one of them through the establishment of Indonesia-China Energy Forum (ICEF). Furthermore, this is also

9 become a different to the research which will be done because it will be more focus on the factors affected China cooperated with Indonesia in gas (2009-2013).

E. Theoretical Framework

1. National Interest

Every country in this world has a national interest to meet the need for the survival of its own country. Each country has different national interest depend on the situation and the condition in the country. In this regard, China as the second largest energy consumer in the world after the United States must has a huge national interest also in the case of energy.

According to Paul Seabury in his book “Power, Freedom and Diplomacy;

The Foreign Policy of the United States” in 1963 which quoted by K.J Holsti in his book “International Politics” 14 explained national interest as follow.

“The ideas of national interests refer to some ideal tools from national goals of a nation... which must be found as a foundation from the implementation of its foreign policy. And the second explanation of national interests is a national goal of a nation that will be achieved in a certain time.”

According to Rosenau,

national interest is a composite declaration derived from those values that a nation prizes most-liberty, freedom, security. Interests are usually expressed in terms of physical survival, economic prosperity, and political sovereignty.15

According to Morgenthau, National interest is divided into several types, there are: Core/basic/vital interests; the interest of a very high value so that a country is willing to fight to achieve them. Protecting areas of the region,

14 K.J. Hoslti, Politik Internasional, Jakarta Pusat: Pedoman Ilmu Jaya, 1987 15 Rosenau, James N. International Politics and Foreign Policy: A Reader in Research and Theory. New York: The Free Press, 1969, P.157.

10 maintaining and preserving the values espoused a state life are some examples of

Core/basic/vital interests. Secondary interests, including all sorts of desire to be achieved each country, but they are not willing to fight where there other possibilities to work through the negotiations as.16

2. Foreign Policy

Foreign policy is a strategy or plan of action made by the decision makers in dealing with other countries or international political unit, and controlled to achieve specific national goals as outlined in the terms of the national interest.17

Foreign policy is run by the government of a country it aims to achieve national interest communities governed despite national interest of the nation at that time is determined by who is in power at the time.18 To fulfill its national interest, the states and actors from the country conduct a variety of such bilateral, trilateral, regional and multilateral cooperation. It is commitment which is basically a strategy to achieve a goal in the context of both domestic and abroad and also to determine a country’s involvement in international issues or the neighborhood.

According to Rosenau, the understanding of foreign policy is the effort of a state by a whole attitude and activity to overcome and get the benefit from the

16 Morgenthau, Hans J. Politics among nations: the struggle for power and peace. new york: knopf, 1985. 17 Plano, Jack C and Roy Olton. Kamus Hubungan Internasional.Bandung: Abardin, 1999, P.5 18 Mochtar, Mas’oed. Ilmu Hubungan Internasional: Disiplin dan Metodologi. Jakarta: LP3ES. 1994. P.184

11 external environment.19 He also said that foreign policy is to maintain and sustain the survival of a nation.20

K.J. Holsti divided two factors that can influence the process of policy making, namely external and internal factors.21 External factors are all conditions that come from outside the country such Policies and actions of other actors.

Domestic factors are all conditions that come from the country concerned such

Socioeconomic and security needs and Geographical and topographical characteristics.

Focusing in China gas cooperation in Indonesia, this research investigates on two internal factors (Rising of China’s economic and gas demand in China’s coastal region) and three external factors (a stable supply, affordable prices, and the ability to transfer resources to the desired locations) that influenced the china’s policy decision to make gas cooperation in Indonesia.

Rising of China’s economic and gas demand in China’s coastal region relatively represent to Socioeconomic and security needs and Geographical and topographical characteristics as internal/domestic factors. While, a stable supply, affordable prices, and the ability to transfer resources to the desired locations represent as policies and actions of other actors as external factor.

3. Energy Security

19 Rosenau, James N, Gavin Boyd, and Kenneth W. Thompson. World Politics: An Introduction. New York: The Free Press, 1976, P.27 20 Ibid, P.32 21 Holsti, K.J. Sixth Edition International Politics; A Framework for Analysis, London : Prentice- Hall International, 1992, P. 272

12

Realist approach of IR theories has been neo-traditionally focused on the definition of international security. In light of a Realist conception presented by

K. Waltz22, states are acting accordingly to their structural power within international relations. The system assumes states to struggle for survival within an international system characterized by an absence of any “world-wide” authority. The rise for power features the interstate relations, including those of the access to resources. K. Waltz predicted that the oil shocks, provoked by the

Arab export embargo, would not constitute any change of power for the West23.

However, security of energy supply became a matter of security motivation for many developed countries in the aftermath of the oil shocks of 1973. K. Waltz argues that there is a continuity of strategies of the major Western states in energy geopolitics. Political actors change, the national strategy remains24

Security can be defined as defensive (in relations to a threat) or offensive

(optimizing of profits in relations with other actors)25. The meaning of security is mainly defensive: security stems from the anarchical structure of society. The energy security is offensive: as is the only vulnerable point of the Western states, they prefer to use the offensive strategy.

Increasing of energy gas demand in China particularly in coastal region should be handed by government. Dependence on external resources made government think about the security of resources. To solve its energy security and

22 Waltz, K. Theory of International Politics, ed. Random House. New York. 1979. 23 Waltz, K. Theory of International Politics, ed. Random House. New York. 1979. P. 195. 24 Waltz, K. Theory of International Politics, ed. Random House. New York. 1979. P.117. 25 Grafstein, R. “What Rational Political Actors Can Expect”, Journal for Theoretical Politics, Vol. 14, no. 2, 2002, P. 139-165.

13 to enhance security of resources, China has foreign policy namely “Resource diplomacy” which fundamentally moved from “self-reliant” policy.26 This

“Resource diplomacy” policy has three components: (1) a stable supply; (2) at affordable prices; and (3) the ability to transfer resources to the desired location.27

Certainly, with these three components of Resource Policy, the gas exporting countries must have three of them to supply gas demand in China. First is a stable supply. It means that the gas exporting countries must have a big gas supply which guaranty gas supply to China in long term. Second is affordable price. It means that gas price offered by the gas exporting countries must be a best price or affordable price for China. And the third is the ability to transfer resources to the desired location. It means that the gas exporting countries must have ability and accessibility to bring gas to China safely.

F. Research Methods

This research will use the qualitative methods. According to Moleong

Lexy, qualitative methods are defined as a research procedure that produces descriptive data in the format of words written or spoken of the people and behaviors that can be observed.28 Qualitative data could be analyzed in a various format, including study opportunities that offered by observation study, interview, sources research, and media research. With observational research study, qualitative research provides an opportunity of expression and greater

26 Herberg, Mikkal E. and David Zweig, China’s “Energy Rise”, The U.S., and The New Geopolitics of Energy, Pacific Council on International Policy, April 2010, P.39 27 Ibid, P.40 28 Moleong, Lexy J. Metodologi Penelitian Kualitatif, Remaja Rosdakarya; Bandung, 2002, P.3

14 explanation. 29 Moreover, the data collection in qualitative research includes three types: interview, observation, and documents.30According to these types the writer more uses the secondary data such as: books, journal, thesis and online news.

Those resources could help a writer on describing and explaining the factors which influenced China’s policy on importing gas from Indonesia.

Moreover those data could identify the other cases beyond the cooperation of

China and Indonesia in gas (2009-2012). The types of qualitative data can greatly help the writer on this research.

G. Research Outline

CHAPTER I INTRODUCTION

A. Background

B. Research Question

C. Research Objectives

D. Literature Review

E. Theoretical Framework

F. Research Methodology

G. Research Outline

CHAPTER II China’s Gas Security and Policy

A. China’s Gas Security

B. China’s Gas Policy

CHAPTER III Cooperation of China and Indonesia in Gas

29 Harison, Lisa. Metodologi Penelitian Sosial, Kencana; Jakarta, 2007 30 W, John Creswell. Research Design: Qualitative and Quantitative Approaches,SAGE Publications, Inc, Thousand Oaks, 1994

15

A. Overview of China and Indonesia Relation

B. Indonesia and China Energy Forum (ICEF)

C. Tangguh-Fujian Project

CHAPTER IV Factors that Influence China’s Policy on Importing Gas from Indonesia

A. Internal/Domestic Factors

1. Rising of China’s Economic

2. Gas Demand in Chinese Coastal Region

B. External Factors

1. A Stable Gas Supply in Indonesia

2. Affordable Gas Price

3. Ability to Transfer Gas to China

CHAPTER V CONCLUSION

16

CHAPTER II

China’s Gas Security and Policy

This chapter aimed to know the relevance of energy security and gas policy in China. It is influenced by the situation of the energy supply and environmental issues.

A. China’s Gas Security

Natural gas security mainly means to prevent supply interruption or unavailability of natural gas in a region, which, in essence, is risk management, i.e. to reduce risk and consequence of natural gas supply interruption to an acceptable extent.31 Development speed of natural gas industry and maturity of natural gas market vary greatly among countries in Asian-Pacific Region. In this region, there are Indonesia, Malaysia, Australia, etc., which are the key natural gas exporting countries. While not only Japan and Korea which need gas supply, but also China heavily relying on imported LNG to meet their internal natural gas demand.32

China actually has abundant energy resources, but none offers an ideal solution to the country’s energy problems. Most of China’s energy resources located in central and southwestern China, far from the more industrialized coastal provinces in the East and South, where energy demand is the greatest and

31 Chunlei, He. Jiang Ziang, and Hu Aolin, China’s Natural Gas Supply Security in a Global Perspective, international gas union, 2009, p.1. 32 Ibid, P.1.

17 alternative energy supplies are most limited.33 Coal as the primary energy in

China has also damaged human health, agricultural output, infrastructure, and the environment with its pollution. Moreover, although coal will continue to play a major role in meeting energy demand, environmental problems and the resulting costs associated with its use are becoming a major concern to Chinese authorities.34

China’s most favorable hydroelectric sites are located in the southwest, far from energy demand centers. Rivers in the north could also produce more electricity, but heavy silt loads make them less desirable hydropower sites.

Constructing giant hydroelectric stations--like the Three Gorges Dam project--is expensive and creates social and environmental disruption. Large hydro dams produce power with no emissions, but smaller plants can often accomplish the same goals with fewer social and environmental costs.35

Other forms of energy, largely undeveloped, are also found far from demand centers. Excellent wind resources exist off China’s southeastern coast and in the remote northwest provinces of Inner Mongolia, Gansu, and Xinjiang. Wind resources for the entire country exceed 250 gigawatts, but installed wind capacity was less than 300 megawatts by mid-1999 due to high power costs, technical difficulties, and distorted markets. Likewise, solar energy resources in the west

33 Girdis, Dean. Stratos Tavoulareas, and Ray Tomkins, Liquefied Natural Gas in China: Options for Markets, Institutions, and Finance, World Bank Discussion Papers No.414, 2000, P.24. 34 Ibid, P.24 35 See, for example, The River Dragon has Come!, for a list of concerns over large dams in China.

18 are abundant, but thousands of kilometers from dense population centers and still expensive.36

China’s natural gas reserves are spread out more uniformly, but supply- demand imbalances remain significant. Domestic gas reserves are unknown to some extent because of limited incentives to find and develop new fields. New pipelines, storage facilities, and distribution networks will need to be constructed to deliver gas to consumers.37

Domestic coal accounts for three-quarters of the country’s total energy demand, making China unique among the world’s major energy consumers.

Hundreds of millions of tons of coal are sent by rail and barge each year to the east coast from the mines in north-central China. Coal prices in the north are as low as $10 per ton at the mine mouth, but transportation costs drive the price of delivered coal to over $35 per ton in the south.38 Coal from southern China is very high sulfur and ash content, making it less desirable

Up until recently, debate and discussion of environmental issues in China has been confined to mainly environmental agencies and research institutes. As

Chinese citizens grow wealthier, they demand higher quality forms of energy, including petroleum products, methane-rich gases, and electricity. China has struggled to expand domestic crude oil production but became a net importer of petroleum in 1994. The Chinese government institutions responsible for

36 Logan, Jeffrey. “Natural Gas and China’s Environment”, Paper for presentation at the IEA- China Natural Gas Industry Conference in Beijing on 10 November 1999. P.4 37 Ibid, p. 4 38 Coal prices fell by approximately 15 percent in 1998 due to oversupply. Climate Change and Developing Countries: Electric Power Choices for China.

19 development of coal and oil-based industries have not considered environmental factors as a top priority in planning for future development of energy sources.39

Natural gas, as a cleaner energy source, accounts for merely 4 percent in the primary energy mix in China today, a proportion that lags behind natural gas use in both the major industrial economies and even many developing countries.

By way of comparison, in 1998 the natural gas use covered 26.55 percent of energy consumed in the United States, 8.45 percent in India and South Korea and

4.27 percent in Brazil.40

The unprecedented floods of the summer 1998 and the growing problem of air pollution in major cities such as Shanghai and Beijing have forced the public and the central government to recognize the importance of environmental protection. A new awareness is emerging that clean energy sources must be utilized to maintain a sustainable social and economic development. China has moved once again to implement acceleration in domestic natural gas supply to meet the uprising requirements for cleaner energy sources. The country is also seriously investigating any possibilities of expanding its gas imports.41

B. China’s Gas Policy

Involvement china to enter the global energy gas market did not rule out the need of cleaner energy which increased due to environmental problems, especially the problem of air pollution caused by burning coal and oil for

39 Xu, Xiaoujie. The Gas Dragon’s Rise: Chinese Natural Gas Strategy and Import Patterns, The Center for International Political Economy and The James A. Baker III Institute for Public Policy Rice University, 1999, p. 2 40 Ibid, p.2 41 Ibid, p. 2

20 industrial activities. This is driven by the attention of government on the issue of global climate change. In the past decade, although China has no concrete obligation on reduction under the Kyoto protocol, China has made great efforts to mitigate climate change. One of them is, china’s government has been promoting natural gas use in order to improve energy diversification and energy efficiency, and as a solution to environmental problems under the 10th Five-Year Plan (2001-

2005).42 Evidence of this determination includes the construction of the country’s first Liquefied Natural Gas (LNG) import terminal in Guangdong and the second

LNG import terminal in Fujian.43 The government set the target of raising natural gas use to 10% of the energy mix in 2020, which was basically reiterated in the

11th Five-Year Plan (2006-2010). 44

With the Chinese government policy on promoting natural gas use in order to improve energy diversification and energy efficiency, and as a solution to environmental problems, China entered to global gas market for the first time by convening bidding for Guangdong LNG terminal supply On November 2001.45

The bidding host, the Joint Executive Office of the Guangdong LNG Terminal &

Trunkline Project, invited seven bidders from Australia, Indonesia, Iran, Malaysia,

Qatar, Russia and Yemen to compete for the 3 mt/y supply contract. The seven companies include Australia LNG Pty Ltd, BP Gas Marketing (Indonesia),

42 Noboyuki, Hikashi. Natural Gas in China; Market evolution and strategy, iea, 2009. p.9 43 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, P.3 44 Opcit. P.9 45 Ibid, P.77

21

Malaysia LNG, National Iranian Oil Company (NIOC), Ras Laffan LNG Co. Ltd

(Qatar), Sakhalin Energy Investment Co Ltd (Russia), and Yemen LNG Co. Ltd.46

In this bidding on August 8th 2002, the Chinese government made a historic announcement that both Australia and Indonesia won the gas supplying contracts for the two terminals in Guangdong and Fujian province respectively.

Australian LNG, the marketing arm of the Northwest Shelf Project, wins a 25 year contract to supply 3 mt/y of LNG to the Guangdong terminal. 47 But the Tangguh project wins a consolation prize with 2.6mtpa for 25 years of LNG to Fujian terminal.48

The consolation prize for Indonesia is given by China due to the price offered and the stake which is hold by CNOOC in Tangguh Indonesia and Fujian

China is cheaper and bigger compared to The Australian’s Northwest Shelf

Project and Guangdong China. CNOOC hold the 60% equity of the Fujian LNG terminal and trunkline project, and its partner Fujian Investment & Development

Co. Ltd. (FIDC) under the Fujian government will have the remained 40% equity.49 CNOOC also acquiring a 12.5% stake in the Indonesian Tangguh LNG project by payment of US$275million from BP, which holds 49.66% of the project’s stake.50

46 Ibid, P. 77 47 Ibid, P. 78 48 Egger, Jim. Tangguh LNG: Commercial Success in a Challenging Environment, 23rd World Gas Conference, Amsterdam, 2006 49CNOOC Fujian Natural Gas Co., Ltd, http://www.cnoocgas.com/qidian/company.do;jsessionid=4C49D4D6FAE8787CB548D9513B8B B73A?actionMethod=list_company&lang=1&pk=20091015090345651104691820304348, accessed on 5 february 2014. 50 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, P.82

22

CHAPTER III

The Cooperation of China and Indonesia in Gas

This chapter explained the cooperation of China-Indonesia relations in gas.

It contained the overview of China-Indonesia relations, ICEF as the energy forum between both countries, and the gas cooperation between China and Indonesia. It aims to know the relations between China and Indonesia from some aspects such social, economic and diplomatic particularly gas cooperation held between both countries.

A. Overview of China-Indonesia Relations

China-Indonesia relation has long historical roots, the relationship which can be traced to the early centuries. Interaction between ancestors of the Chinese nation to the ancestors of Indonesia has begun since 2000 years ago. This close relationship had momentum symbolic in the story of Cheng Ho’s very famous trip in the 14th century. One of the cultural evidence which showed that interaction is bedug which used only by the mosques in Indonesia. Bedug is from China. Kong

Yuanzhi also showed the existence of various contacts between residents in

Mainland China and the archipelago, as well as in the golden age of the Tang

Dynasty, the Ming and Qing Dynasties.51 However, relations between the countries can be said officially had diplomatic relation started in, 1950.

51 Yuanzhi, Kong. Silang Budaya China Indonesia, Jakarta: Bhuana Ilmu Populer, 1999. P.12.

23

Indonesia formally recognizes the sovereignty of China on January 15,

1950.52 Indonesia recorded as the first country to recognize the founding of new

China under communist rule. Then in 1953, Indonesia sent Arnold Mononutu, as the Indonesian Ambassador to Beijing, China. Sending Mononutu as the first

Ambassador of Indonesia marked the beginning of the close relations between the two countries. The event was followed by the signing of a memorandum of RI-

China cooperation, and the replacement of the Chinese Ambassador to

Indonesia.53 Then in the early 1960s, the Jakarta-Peking axis created, growing to be Peking-Jakarta-Pyongyang axis.54 Nevertheless, the relation was suspended on

30 October 1967 due to the occurrence of the "November 30 event" of 1965.55

Although the relation of China and Indonesia had suspended, China effort continued to improve its relations with Indonesia, which is by "trade diplomacy".

The first contact is signed by the presence of delegates the Chamber of Commerce

Indonesia (Kadin) in Guangzhou Trade Fair, in November 1977. Since then, there was personal contacts or organizational. Originally prospect contact is very volatile depending on political issues domestic, but in line with the scale of benefits obtained by both parties. In 1984, the Indonesian foreign minister began proposed the importance of opening a direct trade relation with China. Kadin managed to make important roads to establish trade relations with colleagues in

52 Wibowo, I. dan Syamsul Hadi, Merangkul China, Hubungan Indonesia-Cina Pasca-Soeharto, Jakarta: PT, Gramedia Pustaka Utama. 2009, P.25 53 Ibid.p.26. 54 Justus M, van der Kroef. The Sino-Indonesian Rupture, New York: American-Asian Educational Exchange, 1968. P.2. 55 China emmbasy, http://id.china-embassy.org/indo/zgyyn/sbgxgk/. Accesed on Wednesday, 19th February 2014

24

China. So on 1985, trade relations between Indonesia and China officially opened.

Statistical records in 1988 showed an increase in exports and imports between the two countries, about three times the level in 1985.56

Domestic and international factors play a role in encouraging the thawing relations between Indonesia and China. Soeharto's desire to become a leader Non-

Aligned Movement, are all factors that pave the way normalization of diplomatic relations between the two countries. When the funeral of Emperor Hirohito in

Tokyo in February 1989, Chinese Foreign Minister Qian Qichen met with

President Suharto and stated that the Chinese at all not associated with the PKI.

Since that time the normalization process is discussed in more concrete steps.

Memorandum of repairing relationship was signed by both parties and officially announced during a visit Prime Minister Li Peng to Jakarta on August 8, 1990.57

After the collapse of Suharto, under the more open political atmosphere, ethnic Chinese in Indonesia started to get better political treatment, such the issuance of government regulations that remove categorization of "native" and

"non-indigenous" (1998), the abolition of the prohibition the use of language in public activities and emphasis on the elimination of discrimination (1999), the elimination of the prohibition on public activities related with religion, beliefs and traditions of China (2000), and determination of celebration Chinese New Year as a national celebration of Indonesia.58

56 Suryadinata, Leo. Politik Luar Negeri Indonesia di bawah Soeharto, Jakarta: LP3ES, 1998. P. 136-137. 57 Wibowo, I. dan Syamsul Hadi, Merangkul China, Hubungan Indonesia-Cina Pasca-Soeharto, Jakarta: PT. Gramedia Pustaka Utama, 2009, P. 37 58 Ibid.p.56

25

Under President Abdurrahman Wahid (1999-2001), China had privilege in

Indonesian foreign policy. Wahid made China as the first country he visited as head of state. Wahid’s visiting to China at 1-3 December 1999 can be said to open a new chapter the improvement of bilateral relations. Beijing is willing to disburse aid amount of US$ 5 billion, and about providing credit facilities of US$ 200 million for the purchase of groceries. In addition, it agreed financial cooperation, technology, fisheries, promotion of tourist visits, as well as cooperation in the form of counter trade in the energy sector by swapping Indonesian LNG to

Chinese products.59

In Megawati Sukarnoputri period (2001-2004), the foundation of a good relationship between Indonesia and China continued to be developed. In a state visit to Beijing on 24-27 March 2002, Megawati made a deal with the Chinese government to improving economic and political cooperation. The agreement reached such opening of a new consulate general in a number of cities both China and Indonesia and the formation energy forum (ICEF) between the two countries.60

Average growth of trade between Indonesia and China (2003-2005) ranged US$ 31.64 billion. Overall the total volume of trade between Indonesia and China in 2004, accounting to US$ 13.47 billion, or an increase of 31.8 percent from the previous year, and almost the same as Indonesian and U.S. trading volume, which is calculated to be US$ 13.5 billion. Meanwhile, from the Chinese point of view, Indonesia is now entered in ranked 17th, as the country's export

59 Ibid.p.57-58 60 Ibid.p.57-58

26 receiving countries, with a value of US$ 3.59 billion, or an increase of about 1.01 percent of China's total exports to around the world. Generally, bilateral trade grew rapidly to reach US$ 10 billion, including trade through Hong Kong, while

Chinese investment in Indonesia has now reached a cumulative total amounting to

US$ 282 billion.61

Improving relations between Indonesia and China reached its climax with the signing of the Strategic Partnership Agreement between Indonesia and China in April 25, 2005, when President Hu Jintao visited Indonesia. The Strategic

Partnership will focus on strengthening political cooperation and security, deepen economic cooperation and development, improving socio-cultural cooperation, and expand the non-government relationship. There are three wide field covered by this strategic partnership agreement, namely cooperation political and security, economic and development cooperation and social cooperation culture.62

B. Indonesia - China Energy Forum (ICEF)

The year of 2012 marks a decade of bilateral energy forum namely

Indonesia - China Energy Forum (ICEF) which was formed on March 24, 2002 in

Beijing China through a signing of Memorandum of Understanding (MoU) between the Indonesian government and the Chinese government. This forum is intended to strengthen and expand cooperation between both countries, and also to provide a strong foundation for the cooperation of oil and gas explorations. Until now, ICEF has held four times meeting, first in Bali 2002, second ICEF in

61 Djafar, Zainuddin. Indonesia, ASEAN & Dinamika Asia Timur, Kajian Perspektif Asia Ekonomi Politik, Jakarta: Pustaka Jaya, 2008. P.126. 62 Ibid, P.58

27

Shanghai 2006, third ICEF in Jakarta 2008, and 4th ICEF in in Nanning, China

2010.

According to website of the Ministry of Energy and Mineral Resources of the Republic of Indonesia there are contracts which resulted by ICEF meeting.

First ICEF signed three contracts on 25-27 September 2002. First is the signing of the contract Tangguh-Fujian LNG project between Indonesian and company BP

Executive Agency for Oil and Gas Indonesia and China National Offshore Oil

Corporation (CNOOC), in the Energy Department. Second, the signing of the

Joint Memorandum on The First Indonesia and China Energy Forum between the

PRC and MESDM (Ministry of Energy and Mineral Resources of Indonesia). The memorandum of understanding for cooperation in the field of investment, among others: the construction of PLTU in Palembang and Sumatra, the construction of a gas pipeline from East Kalimantan to Java, and Ombilin underground coal mining projects in west Sumatra. Third, the meeting also resulted in an agreement between the two countries for research collaboration in the field of oil, gas, coal, electricity, research, and development.

Second ICEF meeting signed six contracts at 27-29 October 2006 in

Shanghai China. First is Coal Based Chemical Plant in Pangkep Southern

Sulawesi (Chengda Engineering Corp., Sichuan Chemical Industry Holding Co.).

Second is mining of iron and steel in Tanjung Genting Sukabumi (Yunnan

Geology & Mineral Resources). Third is power Plant in Jeneponto South Sulawesi

(ChengDa Engineering Corp.). Fourth is Bangko Central Power Plant, Muara

Enim South Sumatra (China Huadian Corp). Fifth is joint Study takeover of South

28

Palong project, the Aru Islands (CNOOC). Sixth is tin mining and petrochemicals in Kunming China (PT Antar Niaga Nusantara Indonesia).

Three ICEF meeting signed eight contracts on 22 December 2008 in

Jakarta. First, Memorandum Of Understanding in Relation To The Negotiation

For The Extension Of Madura Strait Production Contract Between Bp Migas And

Cnooc And Husky Madura Ltd. Second is Framework Agreement Regarding

Buyer's Credit for PLTU 2 Jawa Barat, Pelabuhan Ratu Coal Fired Steam Power

Plant Project between PT PLN and The Exim Bank of China. Third, Framework

Agreement Regarding Buyer's Credit for PLTU 1 Jawa Timur, Pacitan Coal Fired

Steam Power Plant Project between PT PLN and The Exim Bank of China. Forth,

Adipala Coal Power Plant 1 X 660 MW in Java Cilacap, Central Java. Fifth,

Power Purchase Agreement (PPA) for Simpang Belimbing Coal Fired Steam

Power Plant 2x113.5 MW Muara Enim, South Sumatra. Sixth, Coal Mining Joint

Venture Agreement Among PTBA, China Huadian Corporation, Regency Gov. of

Muara Enim and PT Truba Alam Manunggal Engineering Tbk. Seventh,

Cooperation Agreement on Development of Biodiesel Plant & Raw Materials

Base among ZTE Agribusiness Co. Ltd., PT Kurnia Selaras and China

Development Bank. Eight, Cooperation Agreement between PT. Bumi Dharma

Kencana (KP PT. David Bumi Perkasa no 545/k.205/2008) and Lark Guangdong

Power Resources Inc. in the East Kalimantan.

C. China-Indonesia Gas Cooperation

Indonesia has been the world’s largest LNG exporter for many years. Its entry into the LNG industry began over thirty years ago with the parallel

29 development of the world-class Bontang LNG Plant in East Kalimantan and the

Arun LNG Plant in Aceh. With its LNG leadership position now being challenged by growing supplies from the Middle East, Indonesia has responded by launching the country’s third LNG supply centre namely Tangguh. BP and its partners is working in close cooperation with the Indonesian Government’s upstream oil and gas regulatory authority, Badan Pelaksana Kegiatan Usaha Hulu Minyak dan Gas

Bumi (BPMIGAS).63

Located in the Bintuni Bay area of Papua Province, the Tangguh LNG

Project has been in development since the mid-1990s when its vast gas fields were discovered. The Tangguh project is the first new addition of Indonesian LNG capacity for almost a decade and the first green field LNG plant in the country in

30 years. Given its remote location in eastern Indonesia, the LNG plant design was based on well establish technology to maximize reliability and availability.64

Tangguh’s unique commercial structure will provide significant assurance to its customers. BP, as the project leader, is in a comprehensive role as upstream operator, LNG plant operator, and LNG ship charterer such that single point accountability is possible for the entire supply chain to the point of sale. This will significantly underpin Tangguh continued growth in the future.65

Tangguh project developed by a consortium of BP Plc., (37.16%), MI

Berau (16.3%), CNOOC (13.9%), Nippon Oil (12.23%), KG Berau/KG Wiriagar

63 Egger, Jim. Tangguh LNG: Commercial Success in a Challenging Environment, 23rd World Gas Conference, Amsterdam, 2006, P.4 64 Ibid, P.4 65 Ibid, P.4

30

(10%), LNG Japan Corporation (7.35%) and Talisman (3.06%).66 Tangguh LNG plant is planned to have a production capacity of 7.6 million tons per annual

(mtpa) from two production trains.67 The LNG project fed natural gas from three production sharing blocks namely the Berau, the Muturi, and the Wiriagar blocks in Manokwari regency.68 Tangguh’s 14 trillion cubic feet proved reserve base will be developed using conventional offshore platforms that will support very prolific well production rates and deliver gas to the plant via two sub-sea pipelines.69

Moreover, with additional 10 Tcf of probable and possible reserves, Tangguh is positioned to offer uniquely attractive supply security and flexibility options for the future.70

These three blocks are controlled through Production Sharing Contract

(PSC) by BP Indonesia Plc. which has 37.5% of the reserves, along with by

Mitsubishi (16%), Nippon Oil Exploration (12%), British Gas (11%), Kanematsu

Corp. (10%), LNG Japan (1%) and China National Offshore Oil Corporation

(CNOOC) which has 12.5% stake in the gas fields.71

Along its development path, Tangguh achieved several firsts for Indonesia and the Asia-Pacific LNG industry in the areas of marketing, commercial

66 Jakarta Post, 31 Desember 2009 in Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.26 67 Egger, Jim. Tangguh LNG: Commercial Success in a Challenging Environment, 23rd World Gas Conference, Amsterdam, 2006, P.4 68 Jakarta Post, 9 August 2002 in Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.26 69 Egger, Jim. Tangguh LNG: Commercial Success in a Challenging Environment, 23rd World Gas Conference, Amsterdam, 2006, P.4 70 Ibid, P.4 71 Jakarta Post, 30 September 2002 in Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.26

31 structure, procurement, and environmental and social responsibility.72 In 2002,

Tangguh captured its first market with a sale to Fujian China and significantly increased its profile into other markets. Tangguh’s sales represent Indonesia’s first ever planned deliveries to China.73 The sending of gas supply from Tangguh

Indonesia to Fujian China finally happened for the first time on 26 July 2009.74 Its first cargo from Indonesia's Tangguh gas field was marking the 25-year LNG supply contract on Fujian LNG project phase I which has entered into a substantial stage.75 By Min Rong tankers in the amount of 138.000 m3, Indonesia gas supply delivered to china since the readiness LNG terminal in Fujian China.76

Delivery of gas supplies from Tangguh Indonesia to Fujian China was started by bidding of gas supply for supplying Guangdong LNG terminal which is attended by seven LNG exporting countries including Indonesia. Although failed to win bidding for supplying LNG to Guangdong China, Indonesia had been surprised by the announcement of China’s government on 8th August 2002 which announced Indonesia as a supplier for Fujian LNG terminal without bidding.

Tangguh won the 2.6 milliar tonne per annual (mtpa) gas supply contract of the

Fujian LNG terminal. 77

The project seems to have entered a fast track. With the signing of

Memorandum of Understanding on September 27, 2002, CNOOC announced that

72 Ibid, P.4 73 Ibid, P.4 74 CNOOC, http://en.cnooc.com.cn/data/html/news/2009-08-06/english/300586.html, accesed on 22 june 2013 75 Ibid 76 Kompas, http://bisniskeuangan.kompas.com/read/2009/07/22/15231353/Kargo.Perdana.LNG.Tangguh.Suda h.Dikirim.ke.Fujian. Accessed on 22 june 2013 77 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, P.82

32 it had signed a Heads of Agreements (HOA) on acquiring a 12.5% stake in the

Indonesian Tangguh LNG project by payment of US$275million from BP, which holds 49.66% of the project’s stake. It is worth nothing that CNOOC’s acquisition price for the Tangguh project is around $0.89 per barrel of oil equivalent, well below CNOOC’s average historical funding and development costs of around

$4/BOE. The Tangguh price is also lower than the company’s earlier acquisition of a 5% stake in Australia’s North West Shelf Gas Project reserves, which cost

CNOOC $320 million and translates to about $1.52 per BOE. The HOA signed in

Jakarta confirmed a 25- year, $8.5bn Sales and Purchase Agreement on supplying

2.6 mtpa of LNG to Fujian LNG project.78

This lower price was caused by three factors. First, During Guangdong

LNG tender in 2002, the global LNG market was declining. The global LNG market was changing from seller’s market to buyer’s market. Buyer’s market happened when the amount of supply in the energy market was higher than demand. It is also caused by the declining market was formed by the scaling down of industrial operation in most Asia’s developing countries which marked by the ceasing of manufacturing machines that left a big amount of energy supply in the stock pile. Second, Energy gas supply was abundant and the energy commodity price was very low. Third, the competition among exporters was very tight due to the arrival of new players from Malaysia, Australia, Brunei Darussalam, and

Qatar in the late 1980s has changed the regional LNG market’s structure from a

78 Ibid, P.82

33 seller’s market to buyer’s market.79 Furthermore, these factors was also as a chance for China to made bidding on supplying gas to its LNG terminal from foreign countries including from Tangguh Indonesia.

79 Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.29

34

CHAPTER IV

Factors that Influence China’s Policy on Importing Gas from

Indonesia

A. Internal / Domestic Factors

1. Rising of China’s Economic

By the early 21st century, China has become a country with a developed economy. China's rapid economic progress cannot be separated from the important role of the Chinese government. The Chinese government set economic reforms which followed by significant economic growth and sustainable industries. Economic reforms have an impact on increasing China’s economic average growth which accounted of 5.8% in 1978 to 8.4% in 2000 and 14.2% in

2007.80

According to World Bank, the size of the Chinese economy overtook

Russia in 1992, Canada in 1993, Italy in 2000, France in 2005 and the United

Kingdom in 2006, becoming the world’s fourth largest in 2006. It is likely to surpass Germany in 2008. According to the purchasing power parity (PPP) measure of the World Bank, the Chinese economy is already the second largest after the United States.81

80 World Bank national accounts data, and OECD National Accounts data files, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, accesed on 22 Maret 2013, 81 Song, Ligang and Wing Thye Woo, China’s Dilemma; Economic Growth, The Environment and Climate Change, ANU E Press, 2008, P.153

35

Along with economic growth and industrialization growth in China, energy has been a headache ever since reform started.82 It has drawn much political attention because continuing economic growth has been threatened by the shortage of energy supply. Chinese leaders realize that “energy is an important strategic issue concerning China’s economic growth, social stability and national security”.83

With this concern, China has had one of the fastest growths in energy demand in the world in the past two decades. China is the world's second-largest oil consumer behind the United States and became the largest global energy consumer in 2010. The country was a net oil exporter until the early 1990s and became the world's second-largest net importer of crude oil and petroleum products in 2009.84 Its total primary energy supply increased from 767 million tonnes of oil equivalent (mtoe) in 1987 to 1221 mtoe in 2002, an almost 60 percent increase while the total primary energy consumption doubled in the same period.85

The using of coal energy in china is amounted of 70% of total primary energy consumption in 2011. China is the world’s top coal producer, consumer, and importer and accounted for about half of global coal consumption.86

82 According to Xu 2002 and Andrews-Speed 2004 in Yi-chong, Xu. “Chinas’s Energy Security”, Australian Journal of International Affairs, Vol.60, No.2, pp: 265-286, 2006, p.268. 83 According to Wen 2005 in Yi-chong, Xu. “Chinas’s Energy Security”, Australian Journal of International Affairs, Vol.60, No.2, pp: 265-286, 2006, p.268. 84 U.S Energy Information Administration, http://www.eia.gov/countries/cab.cfm?fips=CH, accessed on 5 february 2014, 85 Yi-chong, Xu. “Chinas’s Energy Security”, Australian Journal of International Affairs, Vol.60, No.2, pp: 265-286, 2006, p.268. 86 U.S Energy Information Administration, http://www.eia.gov/countries/cab.cfm?fips=ch, accesed on 6th June 2014,

36

Natural gas use in China has also increased rapidly in recent years. In

2000-2012, China's domestic gas consumption has continued to increase. In 2000-

2004, with GDP growth 9.14% gas consumption reached 376.031764 billion cubic feet / day. In 2004-2008, with GDP growth 11.58% gas consumption reached 2,042.78206 billion cubic feet / day. In 2008-2012, with GDP growth

9.26% gas consumption reached 3,878.94508 billion cubic feet / day.87 In 2007, the increase of gas consumption has exceeded the capacity of China’s gas production as shown in the figure 2 below.

Figure 2. China’s natural gas production and consumption, 2000-2011

87 World Bank, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=1 and U.S Energy Information Administration, http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=53&aid=1&cid=CH,&syid=199 8&eyid=2012&unit=TBPD, accesed on Maret 24 2013,

37

This fast growing gas energy consumption in China was fuelled by rapid general economic growth including the speed of industrialization, rapid urbanization and growth of exports.88

Although gas is not primary energy source in China, China has been promoting gas to reduce coal due to simple reasons which are coal has low energy utilization efficiency, low economic benefits, especially in energy intensive industries, and low product competitiveness.89

It also has serious environmental impacts. With coal as the primary

China’s energy consumption, environmental problem became serious issue in

China. According to EIA in 1996, China was the third country in terms of CO2 emission in 1990 and has been the second one after the U.S since 1995. And according to the World Health Organization's report in 1994, there are three of ten most polluted world cities are located in China. They are Beijing, Shenyang in northeast China and Xiían in the western China. Environmental concerns are creating a pressure for the acceleration of natural gas supplies as a way to redress coal and oil burning emissions.90

The following table showed that china has a big role to increase the emissions growth of the world. Emission growth is carbon dioxide from the combustion of fossil fuels including coal and oil.

88 According to IEA 2000, China Statistical Bureau and Friedley 2000 in Yi-chong, Xu. “Chinas’s Energy Security”, Australian Journal of International Affairs, Vol.60, No.2, pp: 265-286, 2006, P.269 89 Yi-chong, Xu. “Chinas’s Energy Security”,Australian Journal of International Affairs, Vol.60, No.2, pp: 265-286, 2006, p.270 90 Xu, Xiaoujie. The Gas Dragon’s Rise: Chinese Natural Gas Strategy and Import Patterns, The Center for International Political Economy and The James A. Baker III Institute for Public Policy Rice University, 1999, P.4.

38

Table 2. A comparison of emission growth rates for the world and China 1971-200591 World China World Excluding China 1971- 1990- 2000- 1971- 1990- 2000- 1971- 1990- 2000- 1990 2000 2005 1990 2000 2005 1990 2000 2005 Emissions Growth 2.1 1.1 2.9 5.5 3.2 10.6 1.8 0.8 1.5 (%) Source : Ligang Song and Wing Thye Woo, China’s Dilemma; The environment and Climate Change, ANU E Press, 2008, P.172

With these reason China needs cleaner energy such gas. Besides that,

China also needs energy diversification to avoid energy shortage and to save economic development. As noted foreign policy expert Professor Jin Canrong of

Renmin University, “Energy shortage is possibly a bottleneck in economic development and in the long term, if this is not resolved, China's economic future will be very unstable”.92 Therefore, China needs energy diversification and energy efficiency such gas due to more efficient to save economic development and also to save environment than coal and oil.

2. Gas Demand in Chinese Coastal Region

Studies or analyses regarding China’s energy challenges have generally focused on the whole of China. But regions in China vary in economic growth, energy demand or supply conditions and also geographic condition (inland or

Coastal region). The coastal and inland regions differ widely in terms of economic

91 Ligang Song and Wing Thye Woo, China’s Dilemma; The environment and Climate Change, ANU E Press, 2008, P.172 92 Foreign policy expert Professor Jin Canrong of Renmin University in Brent Boekestein and Jeffrey Henderson, Thirsty Dragon, Hungry Eagle, IPEG Papers in Global Politics Economy no.21:2005, P.6

39 conditions, demographics, energy resource endowments and energy supply and demand balances.

The coastal region are comprising thirteen provinces and municipalities of

Heilongjiang, Jilin, Liaoning, Beijing, Tianjin, Hebei, Shandong, Jiangsu,

Shanghai, Zhejiang, Fujian, Guangdong and Hainan.93 It is the most important part of China economically, having better wealth and living conditions than the inland region. It is also more urbanized and its location closes to the sea with the export-import industries.

With the gross domestic product (GDP) growth rate in China was maintained at an average of 9.8 per cent annually during 1978-2007, the coastal region has been the main driver of China’s increasing energy use because of a high concentration of export industries, investment and urbanization. The region accounted for 70% of energy demand growth in China between 1996 and 2005.94

According to World Energy Outlook 2007, the main reason for these disparities in energy supply and demand are that investment for construction, infrastructure and industry has centered in the coastal regions. Export industries, one of the main drivers of the Chinese economy so far, has gone almost entirely to the coastal provinces. Jiangsu, Shanghai, Zhejiang and Guangdong alone account for 70% of China’s exports. The share of industry in GDP in 2005 averaged 51% in the coastal region as a whole, compared with 45% in the inland region. Industry in the coastal region grew by 11.1% per year in 2000-2005, compared with 10.1% per year nationally. The share of services in GDP– which has also grown strongly

93 IEEJ, Long Term Energy Demand and Supply Outlook for the 31 provinces in China Through 2030, 2006, P.3 94 Ibid, P.403

40

– is only slightly higher in the coastal region, averaging 40% compared with 38% for inland areas. The services sector on the coast grew by 10.1% per year from

2000 to 2005, compared to 9.9% per year nationally. Agriculture accounts for a much lower share of GDP on the coast (8%) than inland (17%).95

Such conditions have led to a rapid increase in energy demand in coastal.

The coastal provinces become increasingly dependent upon imported fuels, either from inland Chinese provinces or from the international markets. Region by region energy consumption characteristics in china indicate fast growing coastal regions will shift energy consumption from coal to other energies including natural gas. The steady energy shift will lead coal’s share of energy consumption to gradually decline in coastal regions. In inland regions, however, coal remains the dominant energy source to support economic growth.

Table below showed the primary energy consumption outlook as broken down by energy source for the coastal regions. In these regions, as seen in the whole of china, coal will lose its weight with other energies including natural gas.

Coal’s share of total primary energy consumption in coastal regions will fall from

71% in 2002 to 58% in 2030, while the share will rise from 1% to 9% for natural gas. 96

Table 3. Primary Energy Consumption in the Coastal Regions

Mtoe 2002 2010 2020 2030

Coal 379 456 522 606

95 IEA, World Energy Outlook 2007; China and India Insight, P.406 96 IEEJ, Long Term Energy Demand and Supply Outlook for the 31 provinces in China Through 2030, 2006, P.38

41

Oil 131 177 218 269

Gas 6 41 65 89

Nuclear 7 13 31 55

Hydro 5 6 6 6

Renewables 2 10 14 21

Share, % 2002 2010 2020 2030

Coal 71 65 61 58

Oil 25 25 25 26

Gas 1 6 8 9

Nuclear 1 2 4 5

Hydro 1 1 1 1

Renewables 0 1 2 2

Source: IEEJ, Long Term Energy Demand and Supply Outlook for the 31 provinces in China Through 2030, 2006,

Inland regions will also make a shift from coal to other energies including natural gas to diversify energy consumption in a manner that will be different from that in the coastal regions. Coal’s share of primary energy consumption will fall from 76% in 2002 to 68% in 2030, while the share will rise from 4% to 7% for natural gas. 97

Table 4. Primary Energy Consumption in Inland Regions

Mtoe 2002 2010 2020 2030

Coal 393 466 533 614

97 Ibid, P.38

42

Oil 82 108 130 155

Gas 20 38 51 64

Nuclear 0 0 2 4

Hydro 17 38 43 48

Renewables 2 7 10 14

Share, % 2002 2010 2020 2030

Coal 76 71 69 68

Oil 16 16 17 17

Gas 4 6 7 7

Nuclear 0 0 0 0

Hydro 3 6 6 5

Renewables 0 1 1 2

Source: IEEJ, Long Term Energy Demand and Supply Outlook for the 31 provinces in China Through 2030, 2006,

These tables showed that there will be a rapid demand of natural gas in

China particularly in coastal region. With that a rapid demand, the coastal region becomes increasingly dependent upon imported gas, either from domestic or from other countries by pipeline or by LNG.

According to Draft version of SDPC’s Natural Gas Grid Plan (prepared in

2000), quoted by China OGP, it assumed that China’s gas demand in 2005 would not be fulfilled due to gas market expansion cannot be achieve in a day.98 The possibility that a bigger role of LNG import rather than pipeline gas cannot be

98 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, p.27

43

ruled out.99 Moreover, geographically China’s coastal region is close to many

importer countries such as Indonesia as a big LNG exporter. The following table

will show how energy supply, demand and import balances give a big possibility

for import LNG from abroad.

Table 5. Supply, Demand and Import Balance: 2005-2020100

2005 2010 2015 2020

Demand 67.3 115.1 188.0 254.7

Domestic Gas 62.5 96.85 125.1 142.1

Import Total Pipeline 0.0 20.0 45.0 60.0

Gas

LNG 4.0 13.3 17.3 21.3

Import 4.0 33.3 62.3 81.3

Total

Supply Total 66.5 130.1 187.4 223.4

Balance - 0.8 15.0 -0.6 -31.3

Source: Dr. Keun-Wook Paik, The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, p.27

Therefore, due to the economic condition, supply-demand conditions and

geographic conditions, China made policy to cooperate with others countries

including Indonesia to supply gas in LNG to China.

99 Ibid, P.27 100 Ibid

44

B. External Factors

Increasing of energy gas demand in China particularly in coastal region should be handed by government. Dependence on external resources made government think about the security of resources. To solve its energy security and to enhance security of resources, China has foreign policy namely “Resource diplomacy” which fundamentally moved from “self-reliant” policy.101 This

“Resource diplomacy” policy has three components: (1) a stable supply; (2) at affordable prices; and (3) the ability to transfer resources to the desired location.102

Certainly, with these three components of Resource Policy, the gas exporting countries must have three of them to supply gas demand in China. First is a stable supply. It means that the gas exporting countries must have a big gas resource which guaranty LNG production to supply China in long term. Second is affordable price. It means that gas price offered by the gas exporting countries must be a best price or affordable price for China. And the third is the ability to transfer resources to the desired location. It means that the countries must have capability and accessibility to bring gas to Fujian China safely.

1. Gas Supply in Indonesia

Indonesia as LNG exporter country has capabilities for supplying LNG to

China. According to OGJ, Indonesia possessed 104.4 trillion cubic feet (Tcf) of

101 Herberg, Mikkal E. and David Zweig, China’s “Energy Rise”, The U.S., and The New Geopolitics of Energy, Pacific Council on International Policy, April 2010, P.39 102 Ibid, P.40

45 proven natural gas reserves in 2014.103 The country ranked as the 13th largest holder of proven natural gas reserves in the world, and the second-largest in the

Asia-Pacific region. Indonesia was the fourth-largest LNG exporter in 2013, following Qatar, Malaysia, and Australia.

According to Ministry of Energy and Mineral Resources of Indonesia

(ESDM), Indonesia has 103.35 billion barrel of proven natural gas reserves and

47.35 billion barrel of potential gas reserves in 2012.104 Tangguh Plant has LNG average production 116.326.501 Mmbtu in 2009-2012 and increased 8% per annum with average 97.9% of LNG production (including Arun and Badak plant) exported to foreign countries including China in 2004-2012.105 Indonesia also has

103.35 billion barrel of proven natural gas reserves and 47.35 billion barrel of potential gas reserves.

Based on data above, it shows that Indonesia has production, proven and potential natural gas reserves in a big amount. With that amount, Indonesia can assurance the supply to China as long as contract 2.6 Mbtu per year for 25 years.

2. Affordable Gas Price

The affordable gas price is the most important part of getting gas from abroad. There are so many gas resources in the world which has a stable supply, but only some countries gave the affordable gas price for China. One of them is

Indonesia. At the first contract at 2002, under supervision of President

103 EIA, http://www.eia.gov/countries/cab.cfm?fips=ID, accesed on August 4, 2014 104 Data statistik gas bumi ESDM, P.2 http://www.esdm.go.id/statistik/data-sektor-esdm.html, accesed on August 4, 2014 105 Ibid, P.7

46

Megawati’s administration, BP Indonesia as the operator of Tangguh LNG plant signed a contract with CNOOC for the supply of LNG to Fujian China with an agreed price of US$2.40 million per Mmbtu.106 CNOOC acquired a 13.9% stake in the Indonesian Tangguh LNG plant from British Petroleum Indonesia, which holds 37.16% of the project’s stake.107

According to Dr. Keun-Wook Paik, It is worth noting that CNOOC’s acquisition price for the Tangguh project is around US$0.89 per barrel of oil equivalent, well below CNOOC’s average historical funding and development costs of around $4 per BOE.108 The Tangguh price is also lower than the company’s earlier acquisition of a 5.3% stake in Australia’s North West Shelf Gas

Project reserves, which cost CNOOC US$348 million109 and translates to about

$1.52 per BOE. 110

This lower price was caused by three factors. First, During Guangdong

LNG tender in 2002, the global LNG market was declining. The global LNG market was changing from seller’s market to buyer’s market. Buyer’s market happened when the amount of supply in the energy market was higher than demand. It is also caused by the declining market was formed by the scaling down of industrial operation in most Asia’s developing countries which marked by the ceasing of manufacturing machines that left a big amount of energy supply in the

106 Tangguh LNG price raised after deal, http://www.thejakartapost.com/news/2014/07/01/tangguh-lng-price-raised-after-deal.html, accessed on august 4, 2014 107 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, p.78 108 Ibid, P. 78 109 Priestley, Michael. China's reliance on Australian LNG exports, Parliament of Australia, P.2 http://www.aph.gov.au/binaries/library/pubs/bn/eco/lng_exports.pdf, accessed on August 4, 2014 110 Opcit, P. 78

47 stock pile. Second, Energy gas supply was abundant and the energy commodity price was very low. Third, the competition among exporters was very tight due to the arrival of new players from Malaysia, Australia, Brunei Darussalam, and

Qatar in the late 1980s has changed the regional LNG market’s structure from a seller’s market to buyer’s market.111

The condition continued until the second half of 2004, when energy market was still dubbed as ‘buyer’s market’. Demand for Indonesia’s LNG from its traditional buyers, like Japan, South Korea and Taiwan, was still running in the lowest curve. In fact, in order to extend the current contracts to supply some 12 mtpa to Japan that will expire by 2010, Indonesia was considering a request from the Japanese to lower the price, as part of a strategy to maintain its customer loyalty.112 This marketing strategy by decreasing the price was also applied to

Korea Gas Corp. (Kogas) by discounting up to 40% should the firm agreed to extend its contract for another 20 years.113

This ‘buyer’s market’ condition dominated the global energy market from the peak of Asian economic crisis until the second half of 2004.114 This is the background of China’s tender for the Guangdong LNG project, which invited bidders from seven countries invited seven bidders from Australia, Indonesia,

111 Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.29 112 Jakarta Post, 10 December 2003, in Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.29 113 Jakarta Post, 23 June 2004, in Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.30 114 Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.30

48

Iran, Malaysia, Qatar, Russia and Yemen to compete for the 3 mt/y supply contract. It is assumed that this energy market context had influenced price in the

China LNG tender process.

The results of LNG price renegotiation by Indonesian government proved that Tangguh LNG price is still cheap. It needs seven years of negotiation by government to have more than doubled the ceiling price of Tangguh gas sold to

China. Price of LNG in Tangguh-Fujian project accounted twice changing of price. They are from 2004-2006 and 2006-2014. In 2004-2006, the LNG price is changed from US$2.40 per Mmbtu became US$3.40. In 2006-2014, The LNG price is increased from US$3.40 became US$8 per Mmbtu. It is also predicted that LNG price will increase becomes US$10 in 2015, US$12 in 2016, US$13.3 in

2017.115

Although the price can be renegotiated and changed between both countries based on the global energy price, the price is still cheaper compared to

LNG price in the global market particularly in the price of JCC (Japan Crude

Cocktail). According to Jakarta Post on Tuesday July 1, 2014, the original Fujian gas sale agreement was inked during the term of the president Megawati

Soekarnoputri administration in 2002, when the JCC (Japan Crude Cocktail) was capped at $26 per barrel. The calculation resulted in the Tangguh gas selling price being pegged at US$2.4 per mmbtu. In 2014, the spot price for LNG bought by

Japan (currently the world’s biggest LNG user) was at an average of US$14.8 per mmbtu in May. The renegotiate had result the Tangguh gas selling price being

115 Ibid, P.78

49 pegged at US$8 per Mmbtu.116 These price are based on the formulation of price in the Tangguh-Fujian contract. According to Jero wacik, price gas at 2002 is set by 5.25% x JCC (Japan Crude Cocktail) different with this year of 2014 the price formulation used is 65% JCC + 1.5.117

With data above, it showed that Tangguh LNG gas price is cheap and at affordable price for China. Although its price renegotiated almost every year and has changed only for twice, its price is still cheap and affordable for China since its price below global energy price.

3. Ability to Transfer LNG from Tangguh Indonesia to Fujian China

As known before, the biggest LNG demand in China is in Coastal region.

This region has been the main driver of China’s increasing energy use because of a high concentration of export industries, investment and urbanization. According to Draft version of SDPC’s Natural Gas Grid Plan (prepared in 2000), quoted by

China OGP, it assumed that China’s gas demand in 2005 would not be fulfilled due to gas market expansion cannot be achieve in a day.118 The possibility that a bigger role of LNG import rather than pipeline gas cannot be ruled out.119

Moreover, According to Andrew S. Erickson and Gabriel B. Collins in paper titled Pipelines versus Sea Lanes: Challenges and Opportunities for

116 Tangguh LNG price raised after deal, http://www.thejakartapost.com/news/2014/07/01/tangguh-lng-price-raised-after-deal.html, accessed on august 4, 2014 117 LNG TANGGUH: RI Dan China Sepakati Perhitungan Harga, http://industri.bisnis.com/read/20140630/44/239764/lng-tangguh-ri-dan-china-sepakati- perhitungan-harga, Accesed on august 4, 2 118 Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the Natural Gas Market in Asia, Chatam House, 2004, p.27 119 Ibid, P.27

50

Securing Energy Resources, argued that pipelines are not likely to increase

China’s gas import security in quantitative terms, because the additional volumes they bring in will be overwhelmed by China’s demand growth which will grow over time, pipelines notwithstanding. Pipelines are more vulnerable to sabotage and military interdiction than seaborne shipping is and Pipelines are vulnerable to weather and other physical disruptions.120

Even so, seaborne shipping is not merely without threat. It also has threats.

As China’s experienced in the Strait of Malacca, there are three major threats other than natural disasters, oil or gas spill incidents, and ship collisions which can affect the sea lanes of communication (SLOC). First is the threat of piracy incidents and transnational crime. The Strait of Malacca is frequently troubled by piracy attacks.121

Second, maritime terrorism is another concern with China’s growing reliance on seaborne shipments. There is no consensus regarding the seriousness of this problem in the waterways of the Strait of Malacca. On one end are countries like the US and Singapore which tend to highlight the vulnerability of the Strait of Malacca to terrorist attack; they claimed that the threat of attacks has increased since the 11 September 2001. On the other end are Indonesia and

Malaysia, the other two littoral countries, believing that some countries used greater risks of piracy and terrorist attack as an excuse to control the important waterway. As Indonesia’s navy chief, Admiral Bernard Kent Sondakh said in an

120 Erickson, Andrew S. and Gabriel B. Collins. Pipelines Versus Sea Lanes : Challenges and Opportunities for Securing Energy Resources”. In the book titled China’s Energy Relations With Developing Countries, edited by Carrie Liu Currier and Mannochehr Dorraj. P. 178-179 121 Shaofeng, Chen. “China’s Self-Extraction from the “Malacca Dilemma” and Implications”. International Journal of China Studies Vol. 1, No. 1, January 2010, pp. 1-24, P. 8

51 interview that foreign governments – including the US – were primarily interested in the waterway because it was economically strategic, rather than because of terrorism fears. While China has fears that international terrorists might target ships passing through the Strait of Malacca, it also holds misgivings that the US might control the waterway.122

The third concern, probably the deepest one, rests with the US’s active presence in the Asian Pacific waters. Within China perceptions about the influence of the US and its intention of interdicting China’s maritime shipment are divided. In the eyes of some Chinese strategic analysts, the Strait of Malacca is one of the strategic locations that the US endeavours to command in that they are crucial for Washington to gain geopolitical preeminence, check the rise of China and other powers, and control the flow of world energy. (Shi, 2004) China particularly worries that the US might interdict seaborne oil flows into China in the event of its military action against Taiwan. It also holds misgivings that

Washington would make use of its presence in the critically strategic Strait of

Malacca to forestall the People’s Liberation Army Navy (PLAN) to go to blue waters, a precondition for its rise as a world power.123

With assumptions above, it showed that China needs gas in form of LNG which is can transported through sea lanes due to it is faster than pipeline form.

Moreover with the threats in Straits of Malacca, china tried to avoid its shipment from Straits of Malacca including Sunda straits and Lombok straits due to its piracy, terrorism, and US’s active presence in the Asian Pacific waters. Furthermore,

122 Ibid, P. 8 123 Ibid, P. 9

52 with China’s LNG is not transported through Straits of Malacca including Straits of Sunda and Straits of Lombok it will be safer to transport LNG shipment to

China.

Therefore, with these descriptions of assumptions and threats faced by

China, Tangguh plant is a right choice for supplying LNG through seaborne shipping to Fujian LNG terminal due to its location which is located in Papua far from the threats of Straits of Malacca. At the end, LNG can be transported through sea lanes from Tangguh Indonesia to Fujian China safely and fastly.

53

CHAPTER V

Conclusion

This research has explained that the increasing of gas demand in China is an implication of China’s policy on promoting natural gas use. This policy has objective in order to improve energy diversification, energy efficiency, and as a solution to environmental problems. With this condition, China needed to import gas from foreign countries to supply gas demand due to lack of gas resources energy in China, particularly in the coastal region.

Indonesia is one of countries which determined by China to supply gas demand in China. The gas cooperation between China and Indonesia is started in convening bidding for Guangdong LNG terminal supply on November 2001 which is held in China. It is the first time for China, entered global gas market.

China decided Indonesia as a winner of a consolation prize with 2.6mtpa for 25 years of LNG to Fujian.

With this cooperation, this research explained factors that influenced

China’s policy to import gas from foreign countries and determined Indonesia as a supplier LNG for Fujian LNG terminal at 2002. This research used framework or concept of national interest, foreign policy, and internal and external factors.

Based on analysis, this research has resulted two internal factors and three external factors that influenced China’s policy on importing gas from Indonesia.

Two internal factors are the rising of China’s economic and gas demand in

China’s coastal region. Three external factors are Indonesia gas supply, Indonesia gas price, and the ability to transfer gas to China.

54

The rising of China’s economic has an impact on high concentration of export industries, investment and urbanization in Coastal region in China. High concentration of export industries, investment and urbanization affected the increasing energy using in China particularly coal and oil. It has role on increasing environmental problem such air pollution through its burned coal and oil emission. Besides that, China also needs energy diversification and efficiency to avoid energy shortage and to save economic development. Therefore, China needs to use gas energy as a cleaner energy to reduce environmental problem and as energy diversification, and energy efficiency. It also needs to import gas to avoid energy shortage and to save economic development due to lack of gas resources in coastal region.

Increasing of energy gas demand in China particularly in coastal region should handed by government. Dependence on external resources made government think about the security of resources. To solve its energy security and to enhance security of resources, China has foreign policy namely resource diplomacy. Certainly, with these three components of Resource Policy namely a stable supply, an affordable price, and the ability to transfer resources to the desired location, Indonesia as a gas exporting countries must have three of them to supply gas demand in China.

First is a stable supply. According to Ministry of Energy and Mineral

Resources of Indonesia (ESDM), Indonesia has 103.35 billion barrel of proven natural gas reserves and 47.35 billion barrel of potential gas reserves in 2012.124

124 Data statistic natural gas ESDM, P.2,

55

Tangguh Plant has LNG average production 116.326.501 Mmbtu in 2009-2012 and increased 8% per annum with average 97.9% of LNG production (including

Arun and Badak plant) exported to foreign countries including China in 2004-

2012. It means that Indonesia have a big gas production which guaranty gas supply to China in long term.

Second is affordable price. Indonesia LNG price from Tangguh plant is cheap. It is cheaper than Australia gas price which is a supplier for Guangdong

LNG terminal. It means that gas price offered by Tangguh LNG plant is on affordable price for China.

And the third is the ability to transfer resources to the desired location.

Geographically, China and Indonesia is located in Southeast Asia. With the need of gas in China particularly in coastal region, Indonesia has potential location and potential ability to transfer gas due to they are bordered by South China Sea. With

LNG form, Indonesia can transported gas supply through sea lines by tanker to supply LNG Fujian terminal meet the need of gas in China particularly in coastal region. Therefore, with these factors, China decided Indonesia as LNG supplier to supply Fujian LNG terminal.

http://www.esdm.go.id/statistik/data-sektor-esdm.html, accesed on August 4, 2014

56

REFERENCES

Books

Erickson, Andrew S. and Gabriel B. Collins, Pipelines Versus Sea Lanes :

Challenges and Opportunities for Securing Energy Resources. In the book

titled China’s Energy Relations With Developing Countries, edited by

Carrie Liu Currier and Mannochehr Dorraj. P. 178-179.

Harison, Lisa. Metodologi Penelitian Sosial, Kencana; Jakarta, 2007.

Hoslti, K.J. Politik Internasional, Jakarta Pusat: Pedoman Ilmu Jaya, 1987.

Holsti, K.J. Sixth Edition International Politics; A Framework for Analysis,

London : Prentice-Hall International, 1992, P. 272

Djafar, Zainuddin. Indonesia, ASEAN & Dinamika Asia Timur, Kajian Perspektif

Asia Ekonomi Politik, Jakarta: Pustaka Jaya, 2008. P.126.

Justus M, van der Kroef. The Sino-Indonesian Rupture, New York: American-

Asian Educational Exchange, 1968. P.2.

Mochtar, Mas’oed. Ilmu Hubungan Internasional: Disiplin dan Metodologi.

Jakarta: LP3ES. 1994. P.184

Moleong, Lexy J. Metodologi Penelitian Kualitatif, Remaja Rosdakarya;

Bandung, 2002, P.3

Morgenthau, Hans J. Politics among nations: the struggle for power and peace.

new york: knopf, 1985.

Plano, Jack C and Roy Olton. Kamus Hubungan Internasional.Bandung: Abardin,

1999, P.5

Rosenau, James N, Gavin Boyd, and Kenneth W. Thompson. World Politics: An

Introduction. New York: The Free Press, 1976, P.27

57

Rosenau, James N. International Politics and Foreign Policy: A Reader in

Research and Theory. New York: The Free Press, 1969, P.157.

Suryadinata, Leo. Politik Luar Negeri Indonesia di bawah Soeharto, Jakarta:

LP3ES, 1998. P.136-137.

W, John Creswell. Research Design: Qualitative and Quantitative

Approaches,SAGE Publications, Inc, Thousand Oaks, 1994

Waltz, K. Theory of International Politics, ed. Random House. New York. 1979.

Wibowo, I. dan Syamsul Hadi, Merangkul China, Hubungan Indonesia-Cina

Pasca-Soeharto, Jakarta: PT, Gramedia Pustaka Utama. 2009, P.25

Yuanzhi, Kong. Silang Budaya China Indonesia, Jakarta: Bhuana Ilmu Populer,

1999. P.12.

Journal (PDF)

Boekestein, Brent. and Jeffrey Henderson, Thirsty Dragon, Hungry Eagle, IPEG

Papers in Global Politics Economy no.21:2005, P.6.

Shaofeng, Chen. “China’s Self-Extraction from the “Malacca Dilemma” and

Implications”. International Journal of China Studies Vol. 1, No. 1,

January 2010, pp. 1-24, P. 8.

Badaruddin, Muhammad. “Indonesia-China Energy Trade: Analyzing Global and

Domestic Political Economic Significance in Indonesia-China LNG

Trade”, Journal of ASEAN Studies, Vol. 1, No. 1, 2013, pp. 25-40. P.26

Chunlei, He. Jiang Ziang, and Hu Aolin, China’s Natural Gas Supply Security in

a Global Perspective, international gas union, 2009, p.1.

58

Egger, Jim. Tangguh LNG: Commercial Success in a Challenging Environment,

23rd World Gas Conference, Amsterdam, 2006, P.4

Girdis, Dean. Stratos Tavoulareas, and Ray Tomkins, Liquefied Natural Gas in

China: Options for Markets, Institutions, and Finance, World Bank

Discussion Papers No.414, 2000, P.24.

IEA, World Energy Outlook 2007; China and India Insight, P.406

IEEJ, Long Term Energy Demand and Supply Outlook for the 31 provinces in

China Through 2030, 2006, P.3

Logan, Jeffrey. “Natural Gas and China’s Environment”, Paper for presentation at

the IEA-China Natural Gas Industry Conference in Beijing on 10

November 1999. P.4.

Shaofeng, Chen. “China’s Self-Extraction from the “Malacca Dilemma” and

Implications”. International Journal of China Studies Vol. 1, No. 1,

January 2010, pp. 1-24, P.8.

Noboyuki, Hikashi . Natural Gas in China; Market evolution and strategy, iea,

2009. p.9

Grafstein, R. “What Rational Political Actors Can Expect”, Journal for

Theoretical Politics, Vol. 14, no. 2, 2002, P. 139-165.

Herberg, Mikkal E. and David Zweig, China’s “Energy Rise”, The U.S., and The

New Geopolitics of Energy, Pacific Council on International Policy, April

2010, P.39.

Paik, Dr. Keun-Wook. The Implications of China’s Gas Expansion Toward the

Natural Gas Market in Asia, Chatam House, 2004, p.12.

59

Song, Ligang and Wing Thye Woo, China’s Dilemma; Economic Growth, The

Environment and Climate Change, ANU E Press, 2008, P.153.

Xu, Xiaoujie. The Gas Dragon’s Rise: Chinese Natural Gas Strategy and Import

Patterns, The Center for International Political Economy and The James

A. Baker III Institute for Public Policy Rice University, 1999, P.4.

Yi-chong, Xu. “Chinas’s Energy Security”, Australian Journal of International

Affairs, Vol.60, No.2, pp: 265-286, 2006, p.268.

Internet

Bisnis.com, Accesed on august 4, 2014,

http://industri.bisnis.com/read/20140630/44/239764/lng-tangguh-ri-

dan-china-sepakati-perhitungan-harga,

China emmbasy, Accesed on Wednesday, 19th February 2014,

http://id.china-embassy.org/indo/zgyyn/sbgxgk/.

CNOOC, accesed on 22 june 2013,

http://en.cnooc.com.cn/data/html/news/2009-08-06/english/300586.html

CNOOC Fujian Natural Gas Co., Ltd, accessed on 5 february 2014.

http://www.cnoocgas.com/qidian/company.do;jsessionid=4C49D4D6FAE8787CB548D95

13B8BB73A?actionMethod=list_company&lang=1&pk=20091015090345651104691820

304348.

Data statistic natural gas ESDM, P.2, accesed on August 4, 2014,

http://www.esdm.go.id/statistik/data-sektor-esdm.html.

EIA, accesed on August 4, 2014 Kompas,

http://www.eia.gov/countries/cab.cfm?fips=ID.

60

Kompas, Accessed on 22 june 2013,

http://bisniskeuangan.kompas.com/read/2009/07/22/15231353/Kargo.Perdana.LNG.Ta

ngguh.Sudah.Dikirim.ke.Fujian.

U.S Energy Information Administration, accessed on 01 April 2013,

http://www.eia.gov/countries/cab.cfm?fips=CH,

World Bank national accounts data, and OECD National Accounts data files,

accesed on 22 Maret 2013,

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG,

61