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What the Conversion of Arun LNG means for Indonesia

Figure 1 - Arun LNG terminal

Last month the Arun LNG facility in Indonesia stopped producing LNG and shipped its last cargo. Since December 1977 when it exported its first cargo, around 4000 LNG cargoes have been shipped from the facility. The closure of the facility that once had six trains in operation marks the end of a decline that begun in 2000 when its first trains were closed. Arun's closure itself is simple, the reserves which once supplied the terminal have depleted. However, its conversion to a regasification terminal with storage capabilities hints at the changes that the Indonesian gas market, and by extension LNG market, is beginning to undergo.


In 2011, it was announced that Pertamina would invest US$80 million in converting the facility into an LNG receiving and regasification facility. This will help to sustain economic activity in the region that the terminal and its activities initially developed that would otherwise have ground to a halt following the closure of the terminal. The gas from the terminal will be used to generate electricity as well as to supply a local refinery. In a move that is arguably symbolic of the change the LNG market is currently undergoing, the first sale and purchase agreement Arun LNG has signed is with Cheniere Energy which will supply the LNG from its Corpus Christi facility in Texas, USA.

LNG Market

The Arun terminal will also be able to store up to three LNG cargoes independently as only two of its tanks will be needed for regasification. Didik Sasongo Widi, Pertamina's Vice President of LNG, downplayed the possibility of this signalling a move to develop Indonesia as a major trading hub suggesting instead that the extra storage would really only help to optimise the production from the Indonesian Bontang LNG facility when it has excess LNG production (ie summer and autumn). He suggests that part of the reason for this is that Indonesia has a domestic market that will soon be able to absorb domestic LNG production at global market prices. However, he does state that Pertamina is still looking to develop a flexible and reliable model, which could still allow, to some extent, for trading. [1] Although, Indonesia may not have the ideal market conditions to develop as a trading hub.

The fact that Indonesia is an archipelago with gas fields often far away from demand centres, of which Java and Sumatra are the largest, means that gas pipelines are often not economic. Therefore, as gas demand increases, it must look for slightly more unconventional solutions to meet that demand. An integrated LNG system with the ability to export its LNG to a number of import terminals including small-scale terminals that might normally be uneconomical under normal circumstances (possibly FSRUs) would be better than a traditional, albeit unsuitable, pipeline system.

Figure 2 - Location of Indonesia's LNG Plants [2]


The closure and conversion of Arun LNG is the beginning of Indonesia's transition to a minimal net LNG exporter, if not importer. Indonesia may have exported a fairly significant 22.4bcm in 2013, however, in addition to Arun's closure, Bontang is already undergoing a winding down process that is allowing long-term contracts to phase out in preparation for its closure in 2020, with remaining gas at Bontang to be used for local consumption. Whilst new LNG trains and terminal are being built, there is clear evidence of the domestic appetite for gas. Additionally, the Indonesian government is beginning to take action to ensure gas supply is retained for the domestic market. For instance, Tannguh LNG has pledged to supply 40% of the LNG output from a third train to Indonesia's state-owned electricity company and the Donggi-Senoro project is required to supply 30% of the gas produced to domestic markets.

Figure 3 - Indonesian LNG Exports

Indonesia still has significant gas reserves. In 2013, it was estimated as having 2.9tcm of gas, which at current production rates of 70.4bcm will last for around 40 years. However, with consumption set to rise, this gas will run out faster if it tries to meet both domestic demand and export significant quantities.

At present, Indonesia will at the very least honour its long-term contracts, including those agreed by its new terminals. However, in order to meet demand it is also going to have to import LNG, possibly in increasingly large quantities, which might prove expensive. Over the next 20 years or so, the market may well be fairly complex as it honours long-term supply obligations, has increasing amounts of flexible LNG that could be sold abroad or domestically depending on season and price, long-term contracts that will see domestic LNG sold domestically, and lastly, long-term LNG import contracts, such as the one signed with Cheniere Energy. A number of factors will likely dictate where the flexible LNG goes, with local demand and the price spreads most important.


Whilst Indonesia's decline as a major LNG exporter began a while ago, the conversion of Arun into a regasification terminal certainly signifies the increased appetite for LNG in Indonesia. First and foremost this is because of its appetite for gas, but inextricably linked to this is the fact that Indonesia is not geographically built for a pipeline system thus making LNG the most economic option for transporting gas, certainly gas that is not located near to demand centres. Whether Indonesia develops into a trading hub, or in fact is actually able to absorb its domestic gas at market prices remains to be seen. Exactly how it develops will certainly be interesting, as well as exactly how it chooses to balance exports and imports.

November 2014


  1. www.lnghub.biz/pertamina-ready-manage-lng-jigsaw/
  2. www.japanfocus.org/-David_Adam-Stott/3445

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