The IMRE Journal Volume 2 (1) 2008
2008. TU Bergakademie Freiberg
Optimization of Revenues from Trading LNG in Different Geographical Spot
Markets - A Case Study on Exporting LNG from Indonesia to Japan, or,
Alternatively, the UK or the USA
Yessiva, Jan C. Bongaerts
Technische Universität Bergakademie
Freiberg
Correspondence:
Professor Dr. Jan C. Bongaerts
TU Bergakademie Freiberg
Lessingstraße 45,
09596 Freiberg,
Germany
e-mail: J-C.Bongaerts@ioez.tu-
freiberg.de
Revised: 09.05.2008
Online Publication Date: 29.05.2008
http://www.wiwi.tu-freiberg.de/~urm/imre/journal/index.htm
Abstract
Indonesia is one of the main exporters of Liquefied Natural Gas (LNG). Traditionally,
Japan has been the main customer and the infrastructure for LNG in Indonesia was
custom designed for importers in Japan. Since 2001, a new law was passed in
Indonesia with the intention to increase domestic consumption of natural gas. This is
due to the increase of demand for energy in the country. Moreover, the government
plans to replace domestic consumption of oil with gas, in order to regain the status of
net oil exporter and strengthen its position as a member of OPEC. Meanwhile, the
costs of LNG infrastructure are falling rapidly and the regional LNG markets are
merging into a global market. This opens up new opportunities for LNG market
participants. With increasing prices of oil and gas, there is tendency to change over
from traditional long-term contracts to short-term contracts and even spot markets. The
paper analyses these changes in the LNG market with respect to the opportunities for
Indonesian LNG exporters. A case study is developed to present some potential
outcomes of alternative marketing strategies.
Keywords: LNG, globalisation, pricing of oil and gas, market
mechanisms for LNG
Introduction
The high oil price has encouraged an increasing use of natural gas to
produce energy. Another reason for this increase relates to the fact that
natural gas is considered as a cleaner energy resource compared to oil.
Before 1964, pipeline systems were the main means of transporting
natural gas, but with systems the gas cannot be traded over long
distances. In 1964 the situation changed with the start-up of the
Liquefied Natural Gas (LNG) trade between Algeria and France
(Hashimoto et al. 2004). Since then, gas is traded over long distances as
LNG using special cryogenic vessels. Even so, there is no global market
for LNG and LNG is mainly being traded within two Basins, i.e. the
Atlantic Basin and the Pacific Basin.
Currently, both Basins have different pricing systems and different
contractual terms, but this is changing, since LNG buyers are searching
for more flexibility in their LNG contracts, e.g. by opening up
possibilities to divert LNG ships and signing short-term contracts.
Similarly, LNG exporters are investigating opportunities of more
flexibility for the benefit of shaping their energy policies or/and better
market conditions. One exporting country where this development takes
place is Indonesia.
 Page 37 Exporting LNG from Indonesia to Japan
Traditionally, Indonesia exports LNG mainly to Japan,
but, with the adoption of its new Oil and Gas Law No.
22/2001, the intention is to reduce these exports in
order to allow more inland consumption as of 2010.
Given this intention, the fact is that the infrastructure
for gas storage and distribution in the country is not
sufficient and its construction will take time. Hence,
until this infrastructure is in place and since Indonesia
plans to export only 258 million Mmbtu (Million
British Thermal Units) instead of 620 million Mmbtu
per year to Japan, there will be increasing amounts of
so-called uncommitted LNG in the country. This LNG
can be sold, in particular in spot markets. This paper
explores some opportunities for doing so. It is
structured as follows:
Part one presents some information about the LNG
trade in general with some current and future trends.
Part 2 focuses on Indonesia as a Regional player in the
LNG markets. Part 3 presents the case study and, in
part 4, a discussion about the implications for
Indonesia are discussed
The LNG markets
LNG is being traded in the Atlantic Basin and the Pacific
Basin. The main exporting counties are the following:
• Pacific Basin: Australia, Brunei Darussalam,
Indonesia, Malaysia, the United States, and
Russia
• Atlantic Basin: Algeria, Egypt, Libya, Nigeria
and Norway and Trinidad
• Middle East: Oman, Qatar and the United Arab
Emirates.
The main LNG importing countries are the following:
• Pacific Basin: China, India, Japan, South Korea
and Taiwan
• Atlantic Basin: Belgium, the Dominican
Republic, France, Greece, Italy, Portugal,
Puerto Rico, Spain, Turkey, the UK and the
USA
Figure 1 shows some trends in exports of LNG by
country. With the growing importance of the Middle
East exporters as so-called swing producers, there is a
possibility that the LNG trade becomes global, since
these swing producers can balance supply and demand
The IMRE Journal
Yessiva, Jan C. Bongaerts
Figure 1 shows some trends in exports of LNG by
country.
Figure 1: LNG Exports Trend by Country. Source: Smaal, Shell
Global Solutions, 2003 – Mtpa = million tonnes per annum.
in both Basins by performing appropriate short-term
trades. This development may have an effect upon the
traditional practice of signing long-term contracts with
a duration of 20 years and more in the sense that the
share of LNG traded through short-term contracts will
increase. The duration of short-term contracts is only
one year or a few years. In spot markets, the duration is
one year. Short term contracts and, in particular, the
spot market trade, also grow due to reductions in the
investment costs for new LNG projects. With
decreasing costs for the construction of liquefaction
plants, there is no need to trade the entire LNG
production of planned capacity at once under long-term
contracts. Producers of LNG can, therefore, declare a
specific volume as non-committed.
Hence, since the mid 1990s, a new LNG spot trade
developed, in particular in the USA, where 70 percent
of LNG imported in 2004 was mainly based on short-
term trades (Jensen Associates 2007). Similar
developments took place in other countries such as
Spain and South Korea, which rely on spot cargoes to
cover their seasonal demand during the winter peaks.
Currently, LNG spot trading is estimated to amount to
15 - 30 percent of world LNG trade (International Gas
Union 2006). This implies that short-term contracts are
important, but, nevertheless, long-term contracts will
dominate in the future as they are needed for financing
LNG projects.
One factor which is stimulating short term trades
relates to the capacity availability of the infrastructure.
 Page 38 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

Indeed, if no liquefaction and regasification capacity isTransportation costs are largely a function of the
distance between the liquefaction plant and
available, there cannot be any uncommitted volumes.
Since new projects are under way, such capacity is regasification terminal. The cost of constructing a
available. Similarly, currently, new LNG ships are regasification terminal depends on capacity and
being built without dedicated trade. Hence, they are location. At present the largest storage tank capacity is
available for seizing spot trading opportunities. about 200,000 cm (IEA 2005).
Table 1 presents a comparison of estimated costs for
The LNG supply chain setting up an LNG chain in the early 1990s and the
Establishing a market for LNG implies operating of a early 2000s, including the achieved decrease per
reliable supply chain. Technically, the chains consists Mmbtu.
of four stages (excluding pipe line systems within the
stages), as shown in Figure 2. Upstream refers to the Early 1990s Early 2000s
(US$/Mmbtu) (US$/Mmbtu)
exploration and production of natural gas, which is
Upstream 0.5 - 0.8 0.5 – 0.8
then liquefied, transported in cryonic vessels to a port development cost
of destination and regasified for distribution. Liquefaction 1.3 – 1.4 1.0 – 1.1
Shipping (LNG 1.2 – 1.3 0.9 – 1.0
tanker)
Regasification 0.5 – 0.6 0.4 – 0.5
Total 3.5 – 4.1 2.8 – 3.4
Table 1: Investment Costs for an LNG Chain in the early 1990s
and the early 2000s (for a Middle East to Far East Project).
Source: IEA (2005).

A global LNG market?

At the 23rd International Gas Union Conference, held in
Figure 2: LNG Supply Chain. Source: Self-prepared.
Liquefaction plants consist of processing trains and the Amsterdam in 2006, the report of Working Group D3
economic size of one train now is about 3 to 3.5 million dealing with the future of the spot market was
tons (IEA 2005). Qatar is considering building a train presented. The report contained two world maps
that could reach 7.8 million tons (Jensen, J.T. 2004). represented here as Figures 3 and 4 which illustrate the
The cost of a single train plant is around US $1 billion potential transition from a set of Regional markets to
but adding a second train in a Greenfield Facility can one global market for LNG in the future.
reduce the investment cost of this train by 20-30
percent. According to the Gas Technology Institute
(GTI), the construction of a liquefaction plant that
annually produces 8.2 million tons of LNG could cost
$1.5 to $2.0 billion (IEA 2003).
Clearly, this cost can vary because of land costs,
environmental and safety regulations, labour costs, and
other conditions (IEA 2005). Technological progress
has helped to reduce the investment and the operational
costs of a liquefaction plant.
LNG ships are called cryogenic tankers. The typical
size of an LNG tanker is 135,000 to 140,000 cubic
meters of cargo (IEA 2005) and, currently, tanker
designs up to 250,000 cubic meters are under study.
The cost of building a typical size tanker is around
Figure 3: Current Gas Flows. Source: Report of Programme
$160-170 millions (IEA 2005). Committee D3: 2006, page 140.

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 Page 39 Exporting LNG from Indonesia to Japan
Figure 4: Global Gas Trade in the Future. Source: Report of
Programme Committee D3: 2006, Page 141.
Clearly, the difference between the two figures is
striking but the factors explaining the transition to a
global market must be identified. An attempt is made in
this section.
(1) Increase of spot/short-term trading. This leads
to more flexibility for LNG sellers who can be
more responsive to changes in the market, in
particular to changes in demand.
(2) In combination with (1) more flexible Supply
and Purchase Agreements (SPA). Obstacles to
such flexibility consist in bilateral SPA
between one seller and one buyer, obligatory
delivery by an LNG vessel to one specific
buyer, exclusive use of a vessel only for LNG
explicitly mentioned in the SPA and Take-or-
pay clauses which oblige the buyer to
guarantee a minimum payment level,
regardless of the actual receipt of the
contracted LNG volume. Clearly, these
instruments were installed to enable serving
particular customers for long terms of 20 to 25
years. If a seller would wish to serve a new
customer, he has to invest in new capacity. If
these instruments are no longer written in SPA,
both sellers and buyers become more flexible.
(3) In combination with (1) contracts covering
smaller volumes with increased flexibility, for
example designed as Free on Board (FOB),2
which allows buyers to divert cargoes to
specific markets at short notice.
The IMRE Journal
Yessiva, Jan C. Bongaerts
(4) Setting up so-called swap arrangements
covering exchanges of LNG volumes without
price considerations. Swap arrangements can
take place for geographical and logistical
reasons. Hence, in 2000, Trinidad and Tobago
had an SPA with Spain and Algeria had an
SPA with the USA. In consequence, Spain
resold its LNG to the USA, Algeria delivered
its LNG to Spain and Trinidad and Tobago
shipped its LNG to the USA. This arrangement
decreased shipping costs for all parties. Swap
arrangements can also be used to balance out
regional differences in seasonal demand.
Hence, in 2003, Japan, with its peak demand in
the summer season (for cooling and air
conditioning) received a certain volume of
LNG from South Korea and shipped an
equivalent volume of LNG to South Korea in
the winter of 2004 in order to balance out the
peak demand there. This arrangement allows
for a better joint management of peak
demands.
(5) Physical LNG arbitrage transactions between
Basins. As an example, during the winter of
2000–2001, in the USA regasification
terminals had spare capacity. At the time, with
the existence of spot markets, the USA was
very attractive for LNG sellers because of the
high price for LNG. [The Henry Hub price
reached US $ 10 / Mmbtu.] Given their
location and their role as swing producers, this
situation benefitted Middle East exporters.
Hence, European buyers negotiated with their
Middle East suppliers to redirect LNG cargoes,
originally designated for Europe, to the USA in
order to capture the economic benefit of the
high USA LNG price. The LNG supplies for
Europe were covered by spot purchases of UK
gas at lower prices.
(6) Liberalisation of gas markets in the European
Union and the USA through so-called Third
Party Access. This implies that sellers (Third
Parties) have access to pipelines and grid
systems owned and operated by others.
Clearly, TPA is a necessary condition for
creating competitive markets but not
necessarily a sufficient condition for
globalization.
 Page 40 Exporting LNG from Indonesia to Japan
In the case of natural gas and LNG, however, it
leads to a growing importance of so-called
hubs, and, indirectly, to an increase of markets
traders with a potential towards globalisation.
A hub can be defined as a physical transfer
point where several pipelines connect to a
facility that redirects properly metered gas
volumes from one pipeline to another.
Examples of local hubs are Henry Hub in the
USA, NBP in the UK, Title Transfer Facility
(TTF) in the Netherlands and the BEB hub in
Germany. Trading at a hub forms spot markets
and, hence, creates more flexibility.
(7) Price indexation for natural gas and LNG
moving away from an oil index towards a
multiple index, including oil but also natural
gas itself (gas-on-gas pricing) as an instrument
to keep gas prices lower that oil prices.
Currently, there is no clear trend towards an oil
independent gas price indexation, but the
growing importance of short term contracts
may contribute to this trend. In a typical long-
term contract, the contracting parties agree on a
base price which is continuously escalated
according to the price of competing fuels, in
particular, gas oil, heavy fuel oil and crude. In
short-term contracts, there is no need for this
escalation.
Push factors for a global LNG trade
Given the fact that the spot trade in the Atlantic Basin
has been rapidly developing, the Pacific Basin still
trades LNG based on long-term contracts. This
situation is, however changing and, to a certain extent,
one can identify push factors (under control of sellers)
acting globally in the direction of global LNG trade:
These push factors are the following:
Pull factors for a global LNG trade
1. Economic growth is related to higher energy
consumption leading to higher demand in the
future.
2. Trends towards liberalization of the energy
markets, already implemented in the USA and
the European Union starting in the Asia Pacific
Basin. Liberalization increases competition
among energy utilities and may imply a
preferences for more flexible contracts,
including shorter durations
The IMRE Journal
Yessiva, Jan C. Bongaerts
3. Persistent trend to depend on energy imports,
with a growing tendency in the Asia Pacific
Basin, in combination with policies or energy
security, implying a diversification of energy
suppliers and fuels, and a reduction of oil
imports from the Middle East.
4. Clean fuel policies. With environmental
policies for the reduction of greenhouse gas
emissions in place or under development,
natural gas is expected to increasingly replace
coal and petroleum.
5. Development of “downstream” gas
infrastructure on the distribution side as an
important factor driving future demand for gas.
Taken together, these factors may lead to a global
market for LNG in the sense that they can be taken as
parameters for scenario building. This, however, is not
the purpose of the paper. Its intention is rather to take
this development as likely and investigate to what
extent a particular country, in our case, Indonesia, can
benefit from it through appropriate efforts towards
globalising its LNG business. This issue is dealt with in
the following sections.
Indonesia as a regional LNG player in the
Pacific Basin
Indonesia’s shares of consumption of energy are
presented in Figure 5.
Figure 5: Use of energy in Indonesia for 2004. Source: Self-
prepared based on reference Bappenas 2006.
The largest share consists of oil (53 %) followed by
natural gas (30 %) and coal (12 %). Total per capita
energy consumption stood at 19.7 Mmbtu in 2004.
In terms of natural gas, at the end of 2006, an estimated
amount of 2.63 trillion cubic meters (equivalent to
87x109 Mmbtu) of proven gas reserves was reported.
 Page 41 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

In the same year, Indonesia exported 0.62x109 Mmbtu In Japan, LNG prices include Cost, Freight, and
of LNG to Japan, 0.22x109 Mmbtu to South Korea and Insurance (CIF)2 and they were based upon the so-
0.14x109 Mmbtu to Taiwan. Indonesia owns two LNG called Japan Crude Cocktail (JCC) index. JCC is the
facilities at Arun and Bontang, respectively. The plants average CIF value of all crude and raw oils imported in
are dedicated for long-term contracts for exports to Japan in a specific period (Tetsuo, M. and Tsuzuki A.
Japan, Korea, and Taiwan. The Bontang plant has a 2006). The prices of Dubai crude oil and Oman crude
total capacity of 1.16x109 Mmbtu and the Tangguh oil are used as references for setting the spot price for
LNG has a total capacity of 0.39x109 Mmbtu. A third oil in Japan (Tetsuo, M. and Tsuzuki A. 2006). The
plant at Tangguh is under construction at a total capital crude oil price was used as a reference for setting the
cost of US $ 5 Billion and will become operational in LNG price in Japan, because light crude oil was the
2008 (BP 2007). main competitor of gas. However, as the oil price
In 2003, 58 percent of the natural gas was exported, increased, a new formula for setting the LNG price,
mostly as LNG, with only a small portion exported via known as the S-Curve formula, was introduced. The S-
pipelines to Singapore. In the consecutive years, curve formula can be stated as:
domestic consumption increased rapidly and Indonesia
is in the process of changing the objectives of its
energy exports policy. Already in 2006, it was moved
to second position as an LNG exporter with Qatar With:
taking first position due to the diversion of exports to P (LNG): the price of LNG in US $ / Mmbtu
meet soaring domestic needs. Iin Arifin Takhyan, Vice P (Oil): the average price of imported crude oil in
US $ / Barrel
President of PT Pertamina’s, the state oil company,
A: a slope showing the linkage to crude oil
said in October 2007 that his company was to lower
B: the transportation cost in US $ / Mmbtu
supplies to a Japanese buying group by 75 percent after
the current contract expires in 2010 (International
This formula is used to protect sellers when the oil
Herald Tribune of 10 March 2008). Since exports to
price crashes and protect buyers in the case of high oil
Japan will change, it is important to have a look at the
prices. Before the S-Curve formula was used in Asia,
bilateral market for LNG between Indonesia and Japan.
the crude oil parity formula was used to determine the
The bilateral market between Indonesia and LNG price in the Basin. Figure 6 shows both LNG
Japan pricing curves, the crude oil parity line and the S-Curve
Japan has twelve LNG suppliers, which are Algeria, price.
Australia, Brunei Darussalam, Egypt, Indonesia,
Malaysia, Nigeria, Oman, Qatar, Trinidad and Tobago,
the United Arab Emirates and the USA, but Indonesia
is a big player. In 2006, Japan purchased 62.2 million
tons of LNG from abroad, up 7.2 percent, or 4.2
million tons, from 2005, to supply 96.4 percent of its
LNG needs.
Indonesia was the largest supplier to Japan in 2006,
exporting 13.99 million tons, followed by Australia,
Malaysia, Qatar, Brunei and the United Arab Emirates,
which shipped 12.16 million tons, 12.02 million tons,
Figure 6: Crude oil parity line and S-Curve price
7.48 million tons, 6.50 million tons, and 5.31 million Source: Hawaii Energy Policy Forum
tons.
The typical trading instrument is a long-term contract, The oil parity curve is calculated as follows:
because Japanese buyers prefer a security of 20 or
more years of LNG supplies. Trade between Indonesia P LNG = 17.2 x P(Oil)
and Japan started in 1977.

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 Page 42 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

The constant 17.2 is the quotient of 100/5,8, where markets of the USA or the UK, which can be considered
5,8 is the conversion factor of 1 Mmbtu to 1 barrel of as a step to be a partner in a global market.
oil. To assess the possibility, gross profit from trading in
The gray line in Figure 6 is the S–Curve Formula. It is those spot markets is compared with gross profit from
calculated as follows: trading LNG with Japan.
The case study is described best by considering a seller X
1. Range 1: covering the upper range 1 of JCC trading LNG over a one year time period. The main asset
(US $ 23.50 – US $ 29 per barrel of oil), with for the seller to conduct the trade is an LNG tanker.
S-Curve formula: Revenue is calculated as the product of the LNG volume
⎛ 16.5 − PCrude ⎞ sold and the LNG price in the respective market. Gross
PLNG = 14.85 × PCrude + B + ⎜ ⎟× B profit is calculated by subtracting transportation costs,
⎝ 16.5 − 11 ⎠
regasification costs, and the costs for buying the LNG in
2. Range 2: covering the middle range of JCC
Indonesia from revenues.
(US $16.50 – US $23.50 per barrel of oil),
The case study assumes that, from Indonesia, the vessel
with the S-Curve formula:
can sail either to Japan or the UK or the USA to deliver
the LNG. In Japan and in the UK, seller X can only sell
PLNG = 14.85 × PCrude + B
LNG. In the USA, seller X can sell and buy LNG as a
new cargo.
3. Range 3 covering the lower range of JCC (US
The price of LNG in Indonesia is calculated from an S-
$ 11- US $ 16.50 per barrel of oil), with S-
curve formula and it is based on the Indonesia crude oil
Curve formula:
price. Transportation costs are not included. Table 2
⎛ PCrude − 23.5 ⎞
PLNG = 14.85 × PCrude + B + ⎜ ⎟× B presents the monthly LNG price in Indonesia for 1 year.
⎝ 29 − 23.5 ⎠
Months Indonesian LNG Price in
Crude Oil Price Indonesia
Since the LNG trade between Indonesia and Japan is in 2006 (US$/Mmbtu)
based on long term contracts, the contracted LNG (US$/Barrels)
prices change little over time. The transportation cost, January 62.26 5.70
which is written as constant (B) in the S-Curve February 61.19 5.63
formula, is negotiable. This cost can be adjusted when March 61.72 5.66
oil prices change, but the increase is usually still April 68.92 6.14
below US $ 4.00 / Mmbtu. With this type of contract, May 70.01 6.21
Indonesia's exporters are obliged to deliver the
June 67.85 6.07
contracted volumes without benefits from any price
changes which might occur in the LNG spot markets. July 71.95 6.34
August 72.82 6.40
If Indonesia changes its energy policy and if exporters September 62.49 5.72
are interested in trading in spot markets, such benefits October 55.98 5.28
might become available. The important spot markets November 55.90 5.28
are in Europe and the USA and, hence, geographically
December 60.15 5.56
far away. In order to explore the consequences of this
geographical disadvantage, a case study was made. It
Table 2: LNG Price in Indonesia. Source: Self-prepared based on
is presented in the next section. Bappenas, 2006
A case study on exporting LNG from
Indonesia to Japan, or, alternatively, the UK The LNG spot prices in Japan were calculated on the
or the USA basis of the S-curve formula and linked with the spot
Dubai crude oil price in 2006. The spot prices in the USA
The objective of the case study is to find out if there is were calculated on the basis of the Henry Hub spot price
a possibility for Indonesian LNG to enter the spot in 2006.
The IMRE Journal
 Page 43 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

For the calculation of the spot prices in the UK the The terms of the contracts can be defined a follows:
NBP spot prices in 2006 were used. Forward prices, i.e.
the price of selling LNG at ti for delivery at ti+1, were • At t1, seller X signs a contract to deliver LNG
derived from the spot prices. The time period is divided to a buyer at t2 (end of June), t3 (end of
as follows: September), and t4 (end of December) based on
forward prices fixed at t1.
• t1 represents the time period from 1 January After 3 months, at t2, the forward prices for delivery at
until 31 March t3 and t4 might change (in this case study, it is assumed
• t2 represents the second quarter from 1 April that the prices change). Seller X can compare the
until 30 June revenues from signing a contract at t1 and sell LNG at
• t3 stands for the third quarter from 1 July until fixed forward prices agreed at t1 revenues from signing
31 September contracts at both dates t1 and t2 respectively. Depending
• t4 stands for the period of time from 1 October on the outcome of this comparison, the seller will either
until 31 December sign a contract only at t1 or sing contracts at t1 and t2.

Table 3: LNG Spot prices and forward prices in Japan, the UK

and the USA.

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 Page 44 Exporting LNG from Indonesia to Japan
Figure 7 shows the potential plans for Seller X.
Figure 7: Business plan. Source: Self-prepared.
The capacity of the LNG tanker for the spot trade is set
at 150,000 m3 and, hence, it can enter the LNG to
South Hook Terminal in the UK, Everett Terminal in
the USA and to LNG terminals in Japan. It is assumed
that the cost for a new vessel with a size of 150,000 m3
is US $ 320,000,000, while the daily charter rate of the
vessel is around US $ 65,000. In terms of the ship
charter, there are two elements of cost to consider.
The first element is the capital costs of the ship, which
is reflected in the daily charter rate charged to pay off
the loans taken for financing the ship. The second
element is the variable cost of operation of the ship,
including the cost of the crew, the cost of fuel for the
ship, and the provision of spares and operational
support. The variable cost is around US $ 30,000 per
day.
The transportation cost of a chartered ship is around
0.049 US $ / Mmbtu per day and the cost for investing
in a new vessel is 0.04 US $ / Mmbtu per day.
The other cost to consider is the regasification cost. In
the case study it is assumed that the regasification cost
for one Mmbtu per day is US $ 0.0007 in either in
Japan, or, the USA, or the UK.
After identifying all costs, the shipping route is
developed. Since there are three markets where the
LNG can be sold, three fixed routes and a mixed route
can be defined. The fixed routes are the following:
The IMRE Journal
Yessiva, Jan C. Bongaerts
1. Buy LNG in Indonesia – sell (forward) only in
Japan
2. Buy LNG in Indonesia – sell (forward) only in
the USA
3. Buy LNG in Indonesia – sell (forward) only in
the UK
The mixed route can be described as follow:
4. Buy LNG in Indonesia – fulfill contracts to sell
LNG in the agreed market(s) and use the vessel
during times without signed contracts to sell to
other markets.
Outcomes of the case study
The details of some of the calculations are contained in
Appendices 1, 2 and 3 respectively. The outcomes of
these calculations show that, taken the NBP price of the
UK spot market may give a higher revenue to the seller
than selling to Japan. Table 4 shows the summary
outcomes of the case study. The larger gross revenue
which can be obtained from the UK spot market is
explained by the difference in the NBP price in the UK
spot market and the LNG price in Japan. It should also
be taken into account that sailing time to and from the
UK is much higher than traveling time to Japan. This is
also the case for the sailing time to and from the USA.
To the UK, it takes 41 days to sail from Indonesia and
it takes only16 days to sail to Japan. The sailing time to
the USA is 47 days.
Markets Fixed Route Mixed Route
Japan US$ US$
1,827,345.39 2,001,296.08
The UK US$ US$
41,986,149.20 36,969,585.66
The USA -US$ -US$
22,006,908.17 3,709,169.78
Table 4: Gross revenue from selling in spot markets in the three
markets. Source: Self-prepared.
Table 4 also shows that selling LNG to the USA results
in a negative revenue. This is explained by the level of
the Henry Hub price which, on the basis of the data
used, is lower than the LNG price in Japan. Moreover,
sailing time to the USA takes much more time.
As explained above, the results of Table 4 also reflect
the various routes available to the vessel. In opting for
the mixed route, the seller can benefit form the short
 Page 45 Exporting LNG from Indonesia to Japan
sailing time to Japan.
Sailing to the USA implies a longer traveling time and
selling LNG at a relatively low price. However, this
also offers an opportunity to buy at this price and sell
in the LNG cargo in UK at a high price or, as shown in
Appendix 3, return to Japan. In that sense, the vessel is
performing an arbitrage among geographically distinct
markets. This advantage is missing if the vessel sails
between Indonesia and Japan all year round. In
analysing these outcomes, one should, however, take
into account that the case study is based upon 2006
prices.
Implications for Indonesia as a regional
player in the (global) LNG market
Globalisation and opportunities to enter the
globalizing LNG market
Indonesia's strategy to reduce LNG exports to Japan as
a consequence of the Oil and Gas Law No. 22/2001
leads to a liquefaction capacity which is not committed
under long-term contracts. The uncommitted capacity
is intended to be available to domestic buyers, such as
fertilizer plants, petrochemical plants, electricity
generation plants, the state gas company, cement
plants, the steel industry, etc. However, since the gas
infrastructure in the country is still underdeveloped, gas
cannot be stored for a long time. One possible way to
overcome this situation is by selling the uncommitted
capacity in the spot markets, in particular in the USA
and the UK. This was illustrated in the case study with
fixed routes and mixed routes scenarios.
In order to benefit from the effects of arbitrage through
entering spot markets, Indonesia needs to dispose of
uncommitted LNG and spare capacities in LNG
infrastructure such as liquefaction and LNG tankers.
The uncommitted capacity is available when the LNG
exports to Japan are reduced and domestic demand is
not fully absorbing LNG volumes no longer sold to
Japan. In addition, there are other, more technical
conditions which need to be fulfilled. These relate to
technical quality specifications for LNG gas and the
compatibility of LNG tankers with loading terminals
and receiving terminals. Moreover, it should be taken
into account that the spot market is also characterized
by seasonalities which differ in the various
geographical areas of a globalising market.
The IMRE Journal
Yessiva, Jan C. Bongaerts
In terms of quality specifications, it is known that
Japan requires LNG with High Heating Value (HHV).
In the UK, LNG must meet a maximum Wobbe Index
in normal operation of 51.41 MJ/m3. Such technical
specifications are missing in the USA. Since Indonesia
traditionally exports most of its LNG to Japan, its LNG
quality specification meets the Japanese requirements.
If exports are diverse to the UK, an adjustment needs to
be made. This implies additional investments in LNG
liquefaction plants.
When considering uncommitted capacity of LNG
tankers, it should be taken into account that tanker sizes
might fit to installations in ports of charge but may not
be compatible with receiving terminals. Often, tankers
are built to the terms of well-defined long-term
contracts. As a result, their lifetimes are determined
and limited by the duration of these contracts. In such
cases, since tankers are built to the specification of
receiving terminals, they cannot be used for shipping
LNG to buyers making use of non-compatible
terminals. Hence, exporters from Indonesia
traditionally serving dedicated terminals in Japan may
have to charter different LNG tankers which are suited
for use in the spot trades they envisage to enter.
Since the growth of the LNG spot trade is partly driven
by seasonality, sellers must be keen to identify demand,
in particular the peak demand, during certain time
periods of the year within geographical areas of the
potentially globalising LNG market. This might be
seen as a risk or an opportunity, depending upon the
availability of demand and it may set a boundary for
reliability on the spot trade.
When considering the opportunities of arbitrage across
the LNG spot markets, one should not leave out the
fact that Asia has by far the world's largest share
regasification capacitiy. Figure 8 shows that this share
amounts to 69 % with North America covering 10 %
and Europe accounting for 20 %. If a closer look is
taken at this situation, one should know that, within
Asia Japan is the dominating country with just over 40
% of the world’s capacity (PLATTS 2008).
Similarly, South Korea accounts for 12.6% of the
world’s regasification capacity, and, hence, together,
Japan and South Korea make up just over half of the
world's total regasification capacity. However, if
forecasts of new construction around the world, is
taken into account, Japan and South Korea will face
 Page 46 Exporting LNG from Indonesia to Japan
Figure 8: The World’s LNG regasification capacities in 2007.
Source: Self-prepared based on CERA’s Global Regasification
Capacities.
more competition and their combined share of
regasification capacity is expected to shrink dramati-
cally from 53.5% now to just 18.1% by 2013. In the
coming years, investments in regasification terminals are
rising at a faster pace than the associated liquefaction.
According to CERA 2007, this does not come as a
surprise, since the costs of operating regasification
plants represent only 10 to 15 percent of the total LNG
supply chain costs. Hence, for a smooth operation of
global LNG markets, regasification plants should always
be in excess over liquefaction terminals. For producers,
surplus regasification capacity is essential if they have
an interest in moving shipments between Basins as
wanted or intended.
Figure 9: Estimates of the development of global liquiefaction
capacity in LNG producing countries. Source: SAIC’s World LNG
Trade Model (2007).
The IMRE Journal
Yessiva, Jan C. Bongaerts
For buyers, excess regasification capacity is the prime
condition to enter markets in a global procurement
“game”. If all capacity is committed, no other trade
than the one covered by the standing (long term)
contracts is possible. Interestingly enough, with excess
regasification capacities, powerful buyers may have an
interest to strive for even more such excess capacity
since it will be relatively cheap to acquire. In this way,
they speculate on increases of the value of these assets
when demand is picking up
Hence, in essence, with time passing, control of
regasification plants will increasingly cease to be a
competitive advantage in key growth markets, such as
the U.S.A. and Europe. This also means that operators
of such regasification plants will meet with difficulties
in finding customers with an interest in long-term
supply contracts. Moreover, since the expanding
number of countries considering building LNG import
facilities ranges from Brazil and the Netherlands to
Pakistan and New Zealand, and, in that sense also
contributes indirectly to the globalisation of the LNG
trade.
The expansion of regasification capacity is not the only
factor implying the globalization of the LNG trade. As
already mentioned at the beginning of this paper,
producers in the Middle East are seen as crucial given
their growing so-called swing position. Figure 9
illustrates this development.
 Page 47 Exporting LNG from Indonesia to Japan
The trend for globalization is confirmed by other
developments as well. Next to increases in liquefaction
capacity, shipping capacity is to increase by more than
50 % until 2010. Much of that capacity will be non-
committed and, hence, it can be used for “novel”
market solutions, such as using ships not only to
transport LNG, but also as floating regasification and
storage vessels.
With alls these developments taking place at the same
time, the new LNG trade will be much more market
flexible than the traditional LNG trade structure which
was characterized by long-term contracts between
specific sellers and specific users in specific countries
with fixed points of dispatch and delivery. These rigid
terms were commonly believed necessary to finance
the large capital requirements of LNG producers and
importers, but as already explained above, the recent
years have seen dramatic changes in these contracts.
Many newer contracts are not dedicated to specific
buyers in specific markets but to aggregator or
merchant buyers who will seek to move the LNG to the
market of highest value, as with most other
commodities.
Indonesia’s opportunities
For Indonesia, as a regional player in this globalisation
process, the situation is rather complex. The country is
currently facing a serious energy crisis. This is
indicated by long queues for kerosene, LPG shortages,
and power supply interruptions. Moreover, the
government has been supporting energy consumption
with huge subsidies. Power generators and
manufacturers are protesting about the shortage of gas.
At the same time, the country is still the third largest
exporter of LNG (and coal). It is now a net importer of
oil because the consumption infrastructure in the
country is designed for oil. Taken the subsidies into
account, the upsurge in oil prices is worrying the
government and parliament, who have had to make
adjustments to the 2008 fiscal budget. Similar fears
exist with respect to the 2009 budget.
In that context, the government has to solve conflicting
problems. One the one hand, it is tempted to reduce
exports of LNG on long-term contracts, in particular to
Japan and allow for more consumption within the
country. In December 2006 it was decided that 25% of
the production from all future gas-field discoveries
should go to the domestic Indonesian market.
The IMRE Journal
Yessiva, Jan C. Bongaerts
Clearly, this will adversely affect Indonesia’s trade
balance, but this move also raises the issue of pricing
gas for domestic consumers. With the restructuring of
its energy policy in 2001 the government, with the
support of Parliament, also started to liberalize the
domestic markets for oil and gas under the supervision
of new regulatory authorities.
Clearly, producers of gas intended for export through
liquefaction plants are not willing to sell this gas to
domestic consumers for less – except that these insist
on lower prices. Operators of fertilizer plants and of
power have been raising fierce opposition to such price
increases which must be approved by the regulator. In
some cases price increases can be obtained, particularly
for sales to industrial users, but these deals must also
be approved by mid/downstream domestic regulator
BPH Migas. Hence, domestic consumers are supposed
to take into account that the days of cheap energy are
over but are not all of them willing to learn this lesson
fast enough.
For explorers and producers, the far-from-clear
domestic gas utilization policy and its resulting price
risk are creating enormous uncertainty in the
economics of developing known and to-be-found
Indonesian gas fields. In addition, the need to develop
an extensive pipeline network to transfer the gas from
prospective basins to demand centres in Java, is far
from complete and will add additional costs.
The biggest of these pipelines would be to transfer gas
from East Kalimantan – near the site of Bontang - to
central Java. The tender for the pipeline has been
issued, along with tenders for gas pipelines linking east
and west Java. Interest has been reported from Chevron
and CNOOC, as well as domestic gas distributor and
pipeline operator PGN, but the economics are
uncertain. The tariff is estimated at around 90cts/Mcf,
and with wholesale prices in Java currently near
$3/MMbtu, this represents a far less attractive option
than LNG sales.
Higher prices in the domestic markets would also set
incentives to (foreign) investors to increase their efforts
in the energy sectors.
Indeed, the government is keen to reverse the decline in
overseas investment in its electricity, oil and gas
sectors, in order to meet domestic power and gas needs.
Its intention is also to re-establish the country as a net
oil exporter, and, as a result, revalidate its OPEC status.
On the other hand, the government wants to benefit
Page 48 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

from the high prices for oil and gas – in particular LNG
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Notes International Gas Union. (2006). Report of Programme
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2002)
 Page 49 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

Appendix 1
Transportation cost and regasification cost
calculation

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 Page 50 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

Appendix 2
Gross profit calculation for Japan at period t1
– fixed route

The IMRE Journal

Page 51 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

Appendix 3
Gross profit calculation for Japan at Period t1
– mixed route
 Page 52 Exporting LNG from Indonesia to Japan Yessiva, Jan C. Bongaerts

Appendix 3
Gross profit calculation for Japan at period t1
– mixed route

The IMRE Journal