Indonesia-China Energy Trade: Analyzing Global and Domestic Political Economic Significance in Indonesia-China LNG Trade

Muhammad Badaruddin Universitas Bakrie, Indonesia

Abstract Indonesia had been the largest LNG exporter for almost three decades since 1977 to 2005. During 1970s and 1980s, Indonesia’s energy industry boosted its economic growth that valued 80% of the country’s annual exports and 70% of its annual revenues. Meanwhile, Indonesia presents an exceptional case since it decreases its LNG export while it has been developing its largest LNG plant in Tangguh due to prioritizing domestic energy demand. But, since Indonesia eagerly links its economy to China, it uses LNG export as a medium to strengthen Indonesia-China strategic partnership. Tangguh LNG export to China, although it is not Indonesia’s largest LNG export contract, reflects a unique case of a developing country’s international energy trade. Because it presents evolution of Indonesia’s LNG export policy through dynamics of regional and global economic turbulences. This paper analyses the LNG export in the context of Asian economic crisis and its recovery, the peak of crude oil price in 2008 and followed by global financial crisis as the context as well as Indonesia’s domestic political dynamics.

Keywords: international energy trade, Indonesia-China energy cooperation, LNG export policy

Introduction exported its first cargo in 1977 while Arun followed the suit the next year. Badak and Indonesia was an early producer of oil Arun’s export had made East Asia the started in the 1870s. Up to the Second world’s largest regional Liquefied Natural World War, Indonesia produced 148,000 Gas (LNG) market (Nugroho, 2010). barrels of oil per day (Arndt 1983; Hunter The energy industry boosted 1966). Indonesian natural gas industry came Indonesia’s economic growth during the to life when it found a large natural gas 1970s and 1980s by accounting around 80% field at Arun in Aceh Province in 1971, and of the country’s annual exports and 70% of then discovered gas reserves at Badak, near the central government’s annual revenues Bontang in East Kalimantan Province in (Rosser, 2007:39). LNG is also Indonesia’s 1972, totaling about 17.5 trillion cubic feet most significant energy export and has been (tcf) of reserves (Wijarso, 1985). Badak its largest foreign exchange earner (Stott,

Journal of ASEAN Studies, Vol. 1, No. 1 (2013), pp. 25–40 ©2013 by CBDS Bina Nusantara University and Indonesian Association for International Relations ISSN 2338-1361 print / ISSN 2338-1353 electronic 26 Indonesia-China Energy Trade

2008). Indonesia had been the largest LNG CNOOC, which is serving the Fujian exporter for nearly three decades since 1977 Province’s LNG Terminal in China for the to 2005, and its peak export was in 1998 for amount of 2.6 million ton per annum (mtpa) around 36.1 billion cubic meters (Nugroho, for 25 years contract. Another one is with 2010). Indonesia has estimated reserves of Korea's steel company, POSCO and Korea’s around 9 billion barrels of proven and Electric company, K-Power for a total of potential crude oil and 182 tcf of gas, 1.15 mtpa for 20 years of tenure (Alfian, according to energy ministry data (Reuters, 2009). The LNG export contract to Fujian 22 November 2007). was the first contract made with Tangguh operator. It was expected to generate a total of USD8.5 billion revenue for 25 years Profile of Tangguh LNG Project contract period while its two trains total production capacity, will generate USD 21 Tangguh LNG plant project is billion in revenue over the same period. Indonesia’s third LNG centre after Badak Initially, BP and its partners had planned to LNG plant and Arun LNG plant. Tangguh install four trains at the Tangguh plant, plant is located in Berau Bay and fed by gas which will generate USD 45 billion in field in Manokwari Regency. Tangguh gas revenue (JP, 30 September 2002). The project is developed by a consortium of revenue will be distributed to the Beyond Petroleum Plc., (37.16%), MI Berau Indonesian central government, the Papua (16.3%), CNOOC (13.9%), Nippon Oil province and BP with its consortium (12.23%), KG Berau/KG Wiriagar (10%), partners. Under a PSC, BP and its partners LNG Japan Corporation (7.35%) and would keep 30% of all revenue and give the Talisman (3.06%) (the Jakarta Post [JP], 31 remaining 70% to the government. Then December 2009). Tangguh LNG plant is according to the Intergovernmental Fiscal planned to have a production capacity of 7.6 Balance Law No. 25/1999, the central million metric tons (mmt) a year from two government has to hand over 30% of the production trains (Hudiono, 2005) The LNG revenue to the Papua province (JP, 27 project fed natural gas from three December 2002). production-sharing blocks –the Berau, the Muturi, and the Wiriagar blocks in Manokwari regency, which totally Statement of the Problem contained 14.4 tcf proven reserves of natural gas (JP, 9 August 2002). These three blocks Referring to Krasner (1976), there are are controlled through Production Sharing four major state interests in the Contract (PSC) by BP Indonesia Plc. which international trade: (1) political power; (2) has 37.5% of the reserves, along with by aggregate national income; (3) economic Mitsubishi (16%), Nippon Oil Exploration growth; (4) and social stability. Focusing in (12%), British Gas (11%), Kanematsu Corp. international energy trade, it related to (10%), LNG Japan (1%) and China National ‘energy security’ which has been debated Offshore Oil Corporation (CNOOC) which particularly concerning the transnational oil has 12.5% stake in the gas fields (JP, 30 markets. Moreover growing demand of gas September 2002). in the global market will force consumers to Until 2009, The Tangguh LNG plant put big concern of a vital gas supply. operator has signed multi-year contracts to Emerging cooperation among gas supply LNG to several buyers, including to producers and major energy consumer Journal of ASEAN Studies 27 countries will shape a new geopolitical did the global energy market shape considerations that strongly influence the Indonesia’s assumption in accepting LNG highest levels of economic and security pricing formula? policy. Since this research aims to reveal the Energy importer country like China that dynamics of the international energy trade commit to fulfil its large quantity of gas, put in depth and in detail, not shallowly and its energy security systems partly in the broadly, the naturalistic approach seems to hands of the exporters, which will give both be more suitable for this research. In of the two parties a stake in each countries’ addition, the existing data tend to be domestic political stability. Thus, the qualitative in nature as they are derived ‘geopolitics of gas’ is not simply a struggle primarily from news in the mass media and for global position, but also “the immensely interview with the resource person. This political actions of governments, investors, research largely uses a qualitative approach and other key actors who decide which gas because it focuses on the detailed critical trade projects will be built, how the gains aspects using case study on a particular will be allocated, and how the risks of international energy trade. The data are dependence on international gas trading collected using qualitative method, to be will be managed” (Barnes et al., 2006: 4-5). discursive and concerned with a The focus of this study is to investigate comprehensive account of some event or Indonesia’s LNG export from its Tangguh unit. Although it has a small number of plant to Fujian Province in China. The cases, qualitative researchers generally export contract was signed in August 2002 discover abundant information from the to supply 2.5 mtpa of LNG for 25 years in research. Sometimes this research is linked tenure. Under the contract, the crude oil with area or case studies that focus on a price –as the LNG checking price—was particular event, decision, institution, packed in maximum price of USD25/barrel, location, issue, or piece of legislation (King, but the oil price had risen since early 2005 Keohane and Verba, 1995:4). and it reached above USD100/barrel during This research is more likely to 2007-2008. It means, the original contract incorporate an inductive approach and let only valued USD2.67 per million British the data speaks for themselves. This study thermal unit (mBtu), although in fact in is multi-method in focus, involving an 2008 Indonesia could even sell its LNG for interpretive approach to its subject matter. USD20/mBtu to South Korean companies. Therefore, by deploying a wide range of The major emphasis of this study will be interconnected methods this approach not on the Indonesia’s interests in exporting its only helps in developing a more holistic LNG to China. This study will particularly view, but also facilitates explanation and investigates Indonesia’s interests that drove prediction (Denzin and Lincoln, 1998). The its LNG export from Tangguh plant to main tool for data collection in this research China, and the context that shaped the is the analysis of secondary data, supported process of LNG trading tender/negotiation. by a qualitative interviewing as well as Some research questions are addressed internal documentation (documents of the here. What interests drove Indonesia to contracts, etc.). Data analysis is conducted export its LNG? Is there a certain political towards the news from several highly interest behind the deal? How did the credible English newspapers and magazines domestic context shape Indonesia’s attitude as well as online websites, such as The and its bargaining position during the Jakarta Post (most read English-language negotiation of Fujian LNG contract? How newspaper in Indonesia), Antara News 28 Indonesia-China Energy Trade

(Indonesia’s biggest news services in terms owned energy company, Pertamina (JP, 30 of subscriptions), Tempo magazine English May 2000). Edition (most popular magazine in President Megawati Soekarnoputri, who Indonesia), Bloomberg, Reuters, and People took office in July 2001 used any available Daily English Edition (Chinese means to sell Tangguh LNG to China government’s media). An exploratory through a tender for Guangdong Province interview is also conducted with an energy LNG project. As the competition for expert and senior policy maker in energy Guangdong LNG contract between sector in Indonesia. The interviews explore Indonesia and Australia heated up, leaders the context surrounding Indonesia’s LNG of both countries took turn to visit China to export to China, interests that shaped win over the preference of the Chinese Indonesia’s policy to export its LNG, and government. suggestions of Indonesia’s policy response President Megawati visited China and to gain its national interests through energy lobbied the Chinese leaders to secure the cooperation with China. Guangdong LNG contract. In March 2002 Megawati made a state visit to China accompanied by her husband, Taufik Indonesian Government and LNG Kiemas, a large number of her ministers Marketing to China and over 100 Indonesian businessmen. Australian Prime Minister John Howard Soon after taking over from the also lobbied the Chinese leaders to win the authoritarian Suharto’s regime, President LNG project during his visit to China (JP, 9 Habibie’s administration (May 1998- August 2002). October 1999) prioritized Tangguh LNG President Megawati and her Chinese project over other LNG projects across the counterpart, President Jiang Zemin, country, including the expansion of Badak performed a dance together for six minutes LNG plant, development of Donggi-Senoro during a state dinner. The event was widely LNG project and East Natuna LNG project seen as dance diplomacy by Megawati to (JP, 14 June 1999). sell Tangguh LNG to China (JP, 25 March President Abdurrahman Wahid 2002). She also hosted another summit with continued implementing the policy and was Chinese Prime Minister Zu Rongji in involved personally in marketing the Jakarta. On top of that, she sent her Tangguh project. He was eager to offer the husband Taufik Kiemas to lead a LNG particularly to key player states in the government delegation that comprised Asian LNG market (JP, 13 June 2000). some Cabinet members to persuade Beijing Wahid put China’s LNG market on top of to reward Indonesia with the Guangdong his list among others due to the country’s LNG contract (JP, 21 August 2002). fast growing demand of energy. China is However, on 8 August 2002, on the the second largest energy importer after the same day with the 12th commemoration of US. Wahid visited China and sent his the normalization of Sino-Indonesian Minister of Energy Yudhoyono to find diplomatic relations, China announced a buyers for the project in China. From the decision eagerly awaited by Megawati. The beginning, efforts to sell Tangguh LNG to USD13.5 billion contract to supply 3 mtpa of China were conducted with a government- LNG for Guangdong terminal was awarded to-government approach involving a state- to a consortium of Australia’s energy firms (JP, 9 and 21 August 2002). Journal of ASEAN Studies 29

The date was only coincidence. of energy triggered by Asian economic However, as a largest LNG exporter, this growth. was Indonesia’s first failure to win the The decline in demand caused an contract. It was very disappointing because oversupply condition in the LNG energy Indonesia was so desperate for foreign market. The oversupply did not only scale exchanges to cover its budget deficit (JP, 12 down the number of LNG markets, but also August 2002). But surprisingly, China also forced the contract of LNG trading to be announced a ‘consolation prize’ for rescheduled due to the fact that most of the Indonesia without tender process. China LNG contracts were intended for long term offered Indonesia to become a sole bidder deals ranging from 20 to 25 years. for another LNG project in Fujian province, They faced a totally unprecedented a smaller contract that’s expected to value condition. All of the importing countries USD10 billion to supply 2.5 mtpa of LNG to had an oversupply situation and too many Fujian Province (JP, 9 August 2002). contracts. These unstable market situations However, the signed contract only valued have also brought about different USD8.4 billion for 25 years of long term calculations on the buyers’ side. Although export (JP, 26 September 2002). they were favored by the ‘buyer’s market’ condition, they prefer to have short term LNG contracts as they took a wait-and-see Context of Global LNG Market and the approach to long term contracts. In their Tender opinion, short term contracts offered better flexibility in dealing with the period of During Guangdong LNG tender in 2002, uncertainties. Therefore, the energy market the global LNG market was declining. was flooded by ‘short term’ contracts or Energy supply was abundant and the buyer’s preference to buy small quantities energy commodity price was very low. The (JP, 11 April 2001). That is because the competition among exporters was very buyers did not want to be tied with long- tight. This situation was explained by term contracts and therefore the buyers Indonesian Minister of Energy Yusgiantoro became more and more demanding and the that the arrival of new players from competition became tighter (JP, 9 December Malaysia, Australia, Brunei Darussalam and 2000). Qatar in the late 1980s has changed the The condition continued until the regional LNG market's structure from a second half of 2004, when energy market ‘seller's market’ to ‘buyer's market’ (JP, was still dubbed as ‘buyer’s market’. 12August 2002). Demand for Indonesia’s LNG from its The ‘buyer’s market’ happened when traditional buyers, like Japan, South Korea the amount of supply in the energy market and Taiwan, was still running in the lowest was higher than demand. The declining curve. In fact, in order to extend the current market was formed by the scaling down of contracts to supply some 12 mtpa to Japan industrial operation in most Asia’s that will expire by 2010, Indonesia was developing countries. It was marked by the considering a request from the Japanese to ceasing of manufacturing machines that left lower the price, as part of a strategy to a big amount of energy supply in the stock maintain its customer loyalty (JP, 10 pile. Although, just before the crisis, most of December 2003). This marketing strategy by LNG producers have increased their LNG decreasing the price was also applied to production capacity to meet high demand Korea Gas Corp. (Kogas) by discounting up to 40% should the firm agreed to extend its 30 Indonesia-China Energy Trade contract for another 20 years (JP, 23 June and welfare from the central government, 2004). particularly for larger shares in the This ‘buyer’s market’ condition revenues from the exploitation of their dominated the global energy market from natural resources (JP, 13 June 2000). the peak of Asian economic crisis until the In this domestic context, development of second half of 2004. This is the background the Tangguh LNG project was expected to of China’s tender for the Guangdong LNG be a strategic step in order to solve the project, which drew bidders from six problem. It was expected, by exporting countries –Indonesia, Malaysia, Russia, Tangguh LNG, Indonesia would receive Australia, Yemen and Qatar (JP, 9 August sufficient money to finance development in 2002). It is assumed that this energy market the province with 2.3 million populations. context had influenced the China LNG Furthermore, the development was tender process. expected to push the economic growth and bring a multiplier effect in the development of various basic infrastructures. Domestic Context and the Tender The LNG project itself was expected to provide at least 3,000 job opportunities It is very important to understand the during the construction and 1,000 would be political economic context in Indonesia permanently employed in the plant's during the Fujian LNG bidding process. operations. The central government had Prior to the bidding, Indonesia was the last been guaranteeing a fairer share through country in Asia to recover from the the Special Autonomy Law of Papua. The economic crisis started in 1997. Not only did law guarantees the province to get 30% of it hit hard Indonesia’s financial sector, but the revenue from the LNG project and 70% also triggered a broader, systemic political will be for the central government (JP, 30 reform. The crisis created a momentum to September 2002). bring down the authoritarian regime of President Soeharto and provided a period of transition which changed an Competition among the Energy authoritarian system into democracy. Companies During the transition, political liberalization also opened a tight power competition Another issue that also rose during the among elites. Provinces outside Java Island Indonesia’s bidding of Guangdong LNG abundant with natural resources demanded project was the competition among the full autonomy and even campaigned for multinational companies. They were mostly independence. the investors of Badak LNG plant in East One of the richest provinces but always Kalimantan –led by French firm Total Fina marginalized, Papua, intended to break Elf and American firms Unocal Indonesia away from Indonesia. Responding to this and Vico Indonesia— who asked Pertamina demand, Indonesia should deliver a quick to sell LNG from Badak to China. The and concrete action to solve the unrest in investors of Badak plant wanted to sell their Papua. The problem would bring the LNG to China since their plant was already domino effect to other provinces, especially developed and had been serving after East Timor was separated from international market for decades. They also Indonesia. The main concern of the proposed to build the ninth train in the insurgents in Papua was demand for justice Badak plant (JP, 25 July 2001). Journal of ASEAN Studies 31

They argued that exporting LNG from job as it had marketing experience for Badak would be cheaper than from decades. An analyst, Hutapea, said despite Tangguh plant, because Badak LNG was an the extensive corruption within Pertamina expansion project while Tangguh was a over the past decades, Pertamina had new one. Investors of Tangguh would need succeed in putting Indonesia as the world's to spend full investment to build largest LNG exporter and maintained infrastructure and other supporting Indonesia's leadership in the Asian LNG constructions, while Badak project would be market for decades. He said the government more efficient because it would only need to had made a mistake by allowing BP to lead spend money for expansion project. the marketing, “The government made a The efficiency would help Indonesia’s blunder by distrusting Pertamina” (JP, 12 position to give more competitive price for August 2002). the potential customers. Badak investor’s Hutapea said the problem was the reason on the competitive price was security of supply. He further explained relevant with the buyer’s market condition that since the Tangguh plant had not at that time. Indonesia’s chance to win the developed yet, China doubted the Chinese LNG supply contract would be continuity of supply from the Tangguh greater if it proposed to supply LNG from project. They might fear other LNG plants Badak plant (JP, 25 January 2001). could not be responsible to ‘help’ Tangguh Pertamina President Baihaki Hakim argued in case of troubles given the fact that China that Tangguh LNG could be less would deal with BP, rather than Pertamina. competitive, because construction of the “Had Pertamina led the marketing effort, plant had not begun yet, which raised the China would not have been overly worried cost of selling the LNG (JP, 11 April 2001). about the security of supplies because Meanwhile, the Indonesia’s bidding of Pertamina also manages the Arun and Guangdong was also followed by the Badak plants” Hutapea argued. China competition behind the screen between prefers to be served by Pertamina as it has Pertamina and BP. Pertamina was no longer been reliable exporter of LNG since 1970s. the sole seller for Indonesia’s LNG for Meanwhile, BP perceived as the international market and was replaced by relatively new player in Asian LNG market, BP, although during the Habibie and more importantly it did not has any administration, Pertamina was appointed to authority to two other LNG plants that market Tangguh LNG to China (JP, 14 June already operated for years (JP, 12 August 1999). The change of the market leader from 2002). Pertamina’s position was assumed a state owned company to a foreign stronger in the LNG market because it has company was allowed by the new Oil and full authority in two other LNG plants. Gas Law, Number 22/2001 that stipulates These authorities were very important to be foreign contractors are allowed to market able to guarantee continuity of the LNG their production (The State Secretariat of the supply to the importer. As an example, Republic of Indonesia, 2001). when LNG production at Arun plant in The appointment of BP to market Aceh was disrupted, Pertamina could easily Tangguh LNG to China was followed by a secure the continuity of supply by deliver controversy. BP failed to compete with the its reserve capacity from Badak plant in eventual winner, an Australian consortium. Kalimantan. In fact, BP did not have such Analysts argued that appointing BP to ability to guarantee security of LNG supply spearhead Indonesia’s marketing effort was to the importer. a mistake. Pertamina should have done the 32 Indonesia-China Energy Trade

It was the first time a foreign contractor appointment of Pertamina as sales agent led an Indonesia’s LNG marketing team. with other LNG producers such as Total, However, after assessing the failure to win Unocal, Vico and BP Indonesia for Guangdong contract and considering Tangguh.” (JP, 28 May 2004). China’s special offer of Fujian LNG project, Learning from the competition among the government assigned a marketing team contractor firms, the government has led by senior Pertamina official to follow up considered to set up an ‘Indonesia Inc.’, the offer. The team comprised three which would position the authority to Pertamina officials and president of the market Indonesia’s LNG. The body, whose Tangguh project, Gerald J. Preeboom from goal would be to help Indonesia retain its BP. Successfully the Fujian contract was position as a top LNG producer, would signed in August 2002 by Pertamina, not BP consist of BP Migas, Pertamina, the (JP, 20 August 2002). Indonesian Gas Association and contractors Following its ‘success’ to secure the (19 September 2002). Fujian contract, Pertamina intensified a However, the Tangguh LNG export campaign to regain its previous status as contract for Fujian did have a problem that the sole seller of Indonesia’s LNG. An would explode in the following days. The Indonesian analyst argued that Pertamina’s problem was about pricing formula that status as marketing leader would improve caused huge lost to Indonesia, because the Indonesia performance to compete in the contract involved a crude oil check price at market because Pertamina had full control USD25/barrel as the ceiling price for the of the other two LNG plant. It in turn Tangguh LNG for Fujian. Some economic would assure the security of supply, and political issues emerged around the something that BP did not have. However, controversial Fujian contract. other contractors were not enthusiastic about the campaign as they argued that the single seller scheme would be unfair for Problems over the Fujian LNG contract LNG players in Indonesia, with Pertamina no longer the regulator but rather a market Market condition that has been called player (JP, 19 September 2002). ‘buyer’s market’ has made the competition In the wake of competition among very tight. It is very tough when each of the contractor companies, the Oil and Gas LNG exporting countries had to compete by Implementing Body (BP Migas) has employing all possible means available to appointed Pertamina as the sole marketing win LNG supplying contracts. However, agent for Indonesia’s LNG to Japan, various measures deployed to win the Indonesia's largest LNG importer. The export contracts must put a national interest appointment was for scheduling BP Migas’ on the top priority above all calculation and proposal on the extension of Japan LNG interests. import contract that would due in 2010 (JP, Various ways to attract potential buyers, 10 May 2004). including giving a big discount for LNG Pertamina was also asked to market the price, should be calculated in order to gain LNG to South Korea and Taiwan. In late long term interest. Pricing of energy May 2004, Pertamina regained its status to commodity in the international market lead Indonesia’s LNG marketing team. The always fluctuates. Sometimes the price head of BP Migas announced that they had drops because of economic, politic or finished terms and conditions for the security issues, but at other times the price Journal of ASEAN Studies 33 can be very expensive because of these Critics also questioned the involvement contextual variables. As the nature of fossil- of the president’s husband, Taufik Kiemas based energy is very limited and could not who led Indonesian delegation to ‘lobby’ be renewable, the general trend of fossil Chinese policy makers. The rumors in energy price should be higher in the future. Jakarta speculated that Kiemas himself had “The negotiator team had acted against the been possibly taking profits from the law of nature by assuming the fixing price” ‘marketing activities’ (JP, 21 August 2002). said Kurtubi, an energy expert in Jakarta Indonesian government used the (Iswara, 2008). ‘consolation prize’ to forget the frustration Based on this reason, the Fujian LNG for its failure to win the Guangdong LNG contract raised some question on the tender. The Indonesian government used ‘abnormality’ of the contract. But since the the Fujian contract to answer various critics contract was won during the frustrated following the failure to win the Guangdong situation for Indonesia, the direct contract and later other failure to win appointment as the sole bidder without respectively Korea and Taiwan contracts. tender was perceived as the ‘consolation Therefore, the suspicion on the ‘unusual’ prize’. However the ‘consolation prize’ had terms and conditions in the Fujian contract raised a public suspicion on the unfair could be ignored. Moreover, the price of transaction since its early stage. energy commodity was very cheap, so the The suspicion was raised as the formula of the contract could seem normal Indonesian government was not (Simbolon et al., 2002). transparent in announcing the Tangguh The suspicion was justified three years LNG export price to Fujian Province later when the market shifted to ‘seller’s although some experts and politicians had market’ and energy commodity price hiked questioned the issue. The Indonesian in 2005. Again, in answering the suspicion government was seen to keep something on the Fujian contract detail, the then behind public eye while in August 2002 Minister Yusgiantoro said that it was a Minister Yusgiantoro was still in ‘consolation prize’ after Indonesia failed to preparation to send a task force to clarify win Guangdong LNG contract and extend the contract with the Chinese government. export contract to its traditional LNG Even until second half of September 2002, importer such as Japan, Korea and Taiwan the price of LNG export to Fujian was still (Simbolon, et al., 2002). in question. Having failed to win Minister Yusgiantoro explained that the Guangdong contract, also with unclear offer for Indonesia to act as a sole bidder for details of the Fujian contract, the Indonesian Fujian LNG project was already tied with government nevertheless speculatively the specific terms and conditions. One of declared that the result of the bidding was the terms was to put the maximum crude good enough for Indonesia (JP, 7 September oil check price of USD25/barrel as the 2002). ceiling price, which meant that the highest Responding to that progress, many LNG price to be exported to Fujian would experts and politicians criticized the be only USD2.67/mBtu for a period of 25 marketing team’s ability and started years. It meant that the negotiators assumed questioning whether the largest exporting the crude oil price would always be below country was still competitive in the future. USD25 for period of 25 years. “Indonesia's LNG industry is now facing a The ceiling price has limited the doubtful future,” Ramses Hutapea, an fluctuation of the LNG price. If the current energy analyst said (Simbolon et al., 2002). crude oil price is around USD75 to 34 Indonesia-China Energy Trade

USD80/barrel, then the LNG price should be natural resources to meet domestic energy around USD12 to USD15/mBtu. Let us demand. compare this with the price in the Fujian The ‘rising oil price’ and the irony of contract. The contract that involves 2.6 mtpa pricing formulation in LNG export contract of Tangguh LNG for Fujian puts Indonesia to Fujian have raised a discourse on in a huge lost (Kurtubi, 2007). ‘resource nationalism’. However it did not The use of price ceiling has been force the Indonesian government to perceived as a big problem because it will nationalize foreign energy companies as in cause a massive lost for Indonesia, almost Venezuela and Bolivia. This is despite the USD8 billion in a period of 25 years of fact that the idea is based on the vision to export to Fujian. This reality is very hard to use the natural resources for the full benefit swallow. Since Indonesia’s current status as of the people (Soesastro, 2007). a net oil importing country, it has to import In the practical terms, the idea is about crude oil at expensive price, but at the same to prioritize the Indonesia’s national energy time sells LNG at very low price. Importing and mineral companies, to explore, to crude oil is quite costly as Indonesia always product, to refine and to distribute or to subsidizes oil price for its domestic market. market the resources as long as the The reactivation was followed by the companies can do them by themselves. increase of energy demand in the global Then the national companies are allowed to market. However, the oil price hike in the invite other international companies to global market did not affect significantly the manage the resources that the national Indonesia’s exported LNG price for Fujian, companies are unable to manage. But, the China. It caused Indonesia to suffer a huge basic rhetoric is about to free Indonesia lost in its foreign currency since its LNG has from the exploitation of the so called ‘new been exported to Fujian far below the colonialism’. market price. Another disappointment from the The lost was caused by the imposed Fujian contract was the demand to cancel pricing formula that restricted LNG price the contract and find other potential LNG with maximum equivalent to oil price of importers who could give more benefit for USD25/barrel. Indonesia’s LNG price for Indonesia. This is because some analysts Fujian could not climb in line with the oil have argued that the contract could be price in the market and ultimately cancelled and this scenario was actually Indonesia as an LNG exporter could not accommodated by the agreement. As the benefit from the momentum. This was maximum penalty for such eventuality is frustrating since the oil price could not push USD300 million, cancellation makes Indonesia to raise LNG price for Fujian. financial sense, rather than suffering lost for The situation raised reaction among around USD75 billion in 25 years (Iswara et Indonesian political elites. Various al., 2008). discourses on the issue surfaced such as Following the situation, Indonesian ‘resource nationalism’, demand to cancel government preferred to renegotiate the the Fujian LNG contract at all cost, and idea Fujian contract and to conduct more active to do more rational measure by effort to pull China’s investments and loans renegotiating the contract. A visionary idea to Indonesia. The investments and loans that gained strong support was the demand become highly important since Indonesia is to review the energy export policy and to in deep concern to build its energy and change it into one that prioritizes the infrastructure projects. Another measure Journal of ASEAN Studies 35 that was conducted at the same time is to control its tendency to easily export its review the policy of raw material export so natural resources. On the other hand, to that commodities will be for domestic meet domestic energy demand, the consumption or the process of the material government should change its policy by will be inside the country. prioritizing the gas for domestic demand The demand for renegotiation was very than exporting it. Since Indonesia is a net oil rational since the LNG pricing formulation importer, it has been importing oil that is normally reflected the progressive price of more expensive than the gas price. crude oil in the global energy market (Stott, Moreover, the government still 2009). There must be no certain limitation to subsidizes oil retail price that costs more the oil price that serves as the standard or than 10% of Indonesia’s national budget. A checking price to formulate Tangguh LNG prominent energy expert and member of price. The maximum fixed price of the oil National Energy Council, the late Widjajono price was unusual in the global LNG Partowidagdo, in an interview with the trading and this price fixing also never author, said “It is very stupid to export the happened before. cheaper one –LNG—and importing the Ironically, considering the hike of crude expensive one –oil, that is simple” oil price in the global market during July (Partowidagdo, 2010). 2008, when it reached its top position in That logical way of thinking influenced USD147/barrel, the price of LNG in the some of the top policy makers, and the global market should be mirrored around victory of the duet of Susilo Bambang USD20/mBtu. At that time, an energy Yudhoyono and Jusuf Kalla, in the first analyst, Kurtubi, estimated that such direct Indonesian presidential election in pricing difference would cost Indonesia September 2004, has “altered the political USD3 billion annually (Iswara et al., 2008). landscape with regard to LNG export” Meanwhile, when the crude oil price in the (Stott, 2008). That is right what Stott has market is moving around USD100/barrel, mentioned, since Indonesia restores its post- therefore the normal price of LNG in the crisis economy and increases its global market should be four times higher competitiveness in the global market; than the Indonesia’s LNG price for Fujian. Indonesia must seriously increase the While the renegotiations could cause a added value by processing its natural rift in China-Indonesia relations, it is resources inside the country. undeniable that Indonesia has what China That was one of the priority programs of needs, large deposits of natural resources the Yudhoyono-Kalla administration, who (Stott, 2009). Meanwhile, President prefer to push development of resources- Yudhoyono changed Indonesia’s strategy based industry and to minimize export of by pushing for enhanced energy raw materials commodity. Actually, by cooperation with China, especially in the tracing Indonesia’s energy policy through construction of power plants and history, the policy to prioritize domestic infrastructure under the concessionary loan energy demand had risen since 1977 when scheme. Indeed, energy cooperation is an Soeharto administration (1967-1998) important part of the Sino-Indonesia handled Indonesia’s early industrialization relations, similar to Beijing’s growing ties to in 1970s that needed a big amount of energy other resource-rich developing countries in supply. Africa. In the mining sector, new legislation Having suffered a huge lost from the was passed in 2009 which required mining Fujian contract; Indonesia now has learnt to firms to process all mining products into 36 Indonesia-China Energy Trade metal locally instead of just exporting the government decision to cut subsidy for fuel raw materials abroad. These policies affect price in the domestic market. To balance the China because, besides its energy needs, power exercise, the Golkar Party that had a China’s economic growth needs Indonesia’s majority of seats in the parliament and was raw materials. To meet its industry led by the then Vice President Jusuf Kalla, demand, China will continue its was very eager to criticise Megawati’s dependence on Indonesia’s material supply decision to export Tangguh LNG to Fujian from large bauxite field in Kalimantan. at a very low price. The aim of the Golkar’s However, the Indonesian parliament manoeuvre was to raise public awareness discussed banning future bauxite exports in that Megawati had bequeathed a big favour of refining its own bauxite to problem by deciding an export contract. alumina domestically (Stott, 2008). In countering this political attack, After being widely questioned and Pramono Anung, Secretary General of PDIP renegotiated in 2006, the Fujian contract warned Yudhoyono and Kalla that since issue was raised again. In domestic context, both of them were members of the politicians was also used this controversial Megawati administration from 2001 to 2004, issue as a ‘political weapon’ to attack their Yudhoyono and Kalla could also be political opponents. Competition among the responsible for formulating the policy. politicians intensified when the election was Politicians in the parliament also confirmed around the corner. In order to get popular that the Fujian LNG contract could be support they launched a political attack politicised and “become an effective against their rivals. This section will bargaining position” said Alvin Lie, a particularly discuss the domestic political politician outside the two confronting context and its dynamics regarding the groups who posted in Commission on controversial LNG export contract to Fujian Energy (Iswara, 2008). that was signed when Megawati acted as Beside the political issue, Tangguh LNG President of the Republic of Indonesia from problem also had a big magnitude and was July 2001 to October 2004. discussed by various segments of people. The political structure in 2008 already This issue could also be an entry point for changed, compared to the time when the the businessmen to require sufficient energy Fujian contract was signed. At that time, supply to operate their industry machines. Megawati, who failed to stay in power after Meanwhile, it also touched the public the 2004 election, brought her party as an sensitivity since they suffer from periodical opposition power to the government. On black-out as the state-owned power the other side, both Yudhoyono and Kalla, company did not receive sufficient energy who were the cabinet members of Megawati to produce electricity. Moreover, the administration, was in power after government was unable to build defeating Megawati in 2004 presidential infrastructure and other public facilities election. because a large amount of its budget must In 2008, one year before the legislative be allocated to subsidize fuel price in election in April and presidential election in domestic market. In the 2010-2011 budget, July 2009, Indonesia’s political tension was the subsidy is allocated for around 150 high. The opposition leader, Megawati, and trillion of Indonesian Rupiah (USD18 her party (PDI-P, Indonesian Democratic billion), or more than 10% of the total Party of Struggle) aggressively pushed a national budget (Partowidagdo, 2010). parliamentary enquiry to investigate the Journal of ASEAN Studies 37

In August 2008, Kalla claimed that the of various basic infrastructures. The LNG Fujian’s present formula would totally project itself was expected to provide at suffer Indonesia of USD75 billion. He then least 3,000 job opportunities during the asked the House of Representatives (DPR) construction and 1,000 would be to review the Fujian contract and the permanently employed in the plant's Supreme Audit Agency (BPK) would operations. supposedly investigate the country’s lost on How did the global energy market it. Kalla saw the formula was the worst in shape Indonesia’s assumption in accepting the history of Indonesia’s energy industry LNG pricing formula? How did the (Iswara et al., 2008). Kalla urged, "So, the domestic context shape Indonesia’s attitude House has to investigate the Tangguh LNG and its bargaining position during the LNG contract because this contract is the most contract was negotiated? This paper also dangerous. This contract is the worst so far." discusses Indonesian Minister of Energy (JP, 24 August 2008). Yusgiantoro’s explanation about the changing LNG market's structure from a ‘seller's market’ to ‘buyer's market’ that Conclusion dominated the global energy market since the peak of Asian economic crisis until the Revisiting the Research Question second half of 2004. As the background of China’s tender for the Guangdong LNG As a form of international trade, project, it is assumed that the global energy Indonesia’s LNG export to China has a set market had influenced the China LNG of interests, as mentioned by Krasner (1976), tender process. namely, economic growth, aggregate As mentioned above, Indonesia’s national income, social stability, and interests had shaped its LNG export to political power. These interests have been China. This paper also discusses that the reached through a set of measures Fujian LNG contract was received during conducted by the government as discussed the frustrated situation for Indonesia above. Discussion and analysis are following the failure in the Guangdong, provided in order to show Indonesia’s Korea, Taiwan, and Japan. Hence, the interests and how the government manages contract was perceived as the ‘consolation them through answering the research prize’. This part later discusses suspicion on questions. the involvement of Indonesian president’s What interests drove Indonesia to husband, Taufik Kiemas who led export its LNG? Is there a certain political Indonesian delegation to ‘lobby’ Chinese interest behind the deal? This paper policy makers and possibly taking profits explains that the development of the from the ‘marketing activities’. Tangguh LNG project was expected to be a strategic step in order to solve the social and Lesson learned political stability in Papua Province. It was also expected, by exporting Tangguh LNG, There are several things that can be that Indonesia would receive sufficient learned from Indonesia’s LNG export to money to finance development in the China. First, in pursuing state’s interests province with 2.3 million populations. through international trade, the government Furthermore, the development was should also consider the global market expected to push the economic growth and condition in the future. This is because the bring a multiplier effect in the development global market is always dynamics, 38 Indonesia-China Energy Trade particularly energy commodity prices that temporary circumstances. The compass for always fluctuates and is influenced by the government is neither a particular political economic, politic and security situations, interest nor a short-term domestic political besides speculation in the future market. competition. Instead it should be to pursue The negotiators in international trade, a state’s political power, aggregate national particularly in exporting LNG, should be income, economic growth, and social careful in formulating the export price, stability. It is also required to maintain since LNG prices are not internationally stronger cooperation with its partners in standardized. There are differences in every international trade, in this case Indonesia single trader and they vary by region of and China. Moreover, the partner is the destinations, although the LNG price emerging economic and military power that mostly refers to the crude oil price in the will strategically influence the regional spot market (Girianna, 2009). Learning from stability where Indonesia is also situated. the Fujian pricing formula that restricted Indonesia’s LNG price to a very cheap price, it would be better to use a progressive About Author pricing formula instead of using ceiling price or putting an upper limit for the LNG Muhammad Badar is the Head of price. Department of Political Science, Bakrie Second, before releasing energy export University. His research interest is in policy, the government should consider its the political economy of energy own country’s domestic demand first. The security. He can be contacted at government should give priority to [email protected]. generating its own economic development by allocating the energy for domestic need. It is an irony that while Indonesia was Reference exporting most of its LNG, its local industry was suffering because of its lack of energy Atje, R., Gaduh, A. B. (1999), supply. Moreover, the government has to “Indonesia-China economic relations: an import oil and subsidize the oil retail price Indonesian perspective,” Centre for that costs more than 10% of Indonesia’s Strategic and International Studies Working national budget. Concerning this situation, Paper, Jakarta: CSIS, available at a member of Indonesia’s National Energy http://www.csis.or.id/working_paper_file/1 Council said “It is very stupid to export the 3/wpe052.pdf. cheaper one –LNG—and importing the Backus, D. K., Crucini, M. J. (2000), “Oil expensive one –oil” (Partowidagdo, 2010). Prices and the Terms of Trade,” Journal of The policy to prioritize domestic energy International Economics, 50(1), pp. 185-213. demand will strengthen the country’s Barnes, J., Hayes, M. H., Jaffe, A. M., industrial capability. In turn, this condition Victor, D. G. (2006), “Introduction to the will create more job opportunities, give study,” in Victor, David G., Amy M. 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