Indonesia politics threatens Sulawesi LNG -sources

By Muklis Ali

JAKARTA, June 17 (Reuters) - A huge LNG project in Sulawesi could be jeopardised after Indonesia's vice president urged that the gas be set aside for domestic use rather than exported, sources at the country's energy ministry said on Wednesday.

State oil firm Pertamina, Indonesia's PT Medco Energi International (MEDC.JK) and Japan's Mitsubishi Corp. (8058.T) have agreed to build the Donggi-Senoro plant in Sulawesi, which will have a capacity of 2 million tonnes per year.

The plant, due to be operational by 2012 or 2013, would give LNG production in Indonesia, the world's third-biggest exporter after Qatar and Malaysia, a much needed boost as the country struggles to juggle exports and local needs.

There has been pressure from lawmakers and the government to raise the gas price after an initial agreement to sell LNG to Japanese buyers, but the country's vice president recently intervened to say the gas should not be exported.

Vice President Jusuf Kalla, who is standing in presidential elections in July, said this month the gas from the Sulawesi project should be sold to the domestic market.

Kalla's chances of winning against President Susilo Bambang Yudhoyono seem slim at the moment, but the election could slow decisions on crucial project details, strengthening the chance of delays or the prospect of buyer and investor pullouts.

The project would be uneconomic if it just served the domestic market, an energy ministry source, who declined to be named because of the sensitivity of the issue at election time, said.

"The LNG plant has already entered the political arena," the source said. "The cost to develop gas fields and to build the plant is rising. It would be difficult to bring the gas to the domestic market in the form of LNG because of the high price."

The Sulawesi LNG plant, which will cost at least $1.4 billion to build, will receive natural gas from Pertamina and Medco.

"Pertamina and Medco have urged the government that the LNG should be exported to get economic value from the project and guarantee the investment from Japan," the source said.

Pertamina and Medco previously agreed to sell 1 million tonnes of LNG from the Donggi-Senoro plant to Chubu Electric Power Co (9502.T) and 1 million tonnes to Kansai Electric (9503.T). The contracts will run for 15 years.

A second energy ministry source said that Pertamina and Medco had already guaranteed some gas would go to the local market.

"It is difficult to approve the project under the current situation, especially during the presidential election," the second source said. "Because pressure to meet domestic gas demand for industry is a political issue in the campaign."

Medco President Director Darmoyo Doyoatmojo told Reuters in a June 3 interview he was "quite optimistic" on reaching a deal because of compelling economic reasons, although he warned against too much government pressure to raise gas prices.

Asked about the project, Pertamina spokesman Basuki Trikora Putra said only that it was still waiting for government approval. Mitsubishi officials could not immediately be contacted.