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Arco to Develop Huge Indonesian Gas Field

Energy: Billion-dollar project would boost natural gas reserves 50%. Analysts call it a gamble.

September 03, 1997|CHRIS KRAUL | TIMES STAFF WRITER

Atlantic Richfield Co.'s plan to spend about $1 billion over the next six years to help develop a massive natural gas field in Indonesia amounts to an enormous gamble at a time when several similar projects are chasing the same Asian energy customers, analysts said.

On Tuesday, Los Angeles-based Arco said it is finally going forward with the development of the New Guinea offshore field it discovered in 1994. Combined with a gas liquefaction plant to be built by the Indonesian state oil company Pertamina, the price tag on the joint venture would exceed $3 billion.

For the first time, Arco also quantified the field's reserves, saying they equate to more than 2 billion barrels of crude oil, making it the third-largest find in Arco history, behind its discoveries at Prudhoe Bay and the Kuparuk River in Alaska.

The Indonesian gas field--named Tangguh (an Indonesian word that means strong and resilient) by the country's president--would boost Arco's proven natural gas reserves by 50%. Arco's roughly one-third share of the field tops 4.5 trillion cubic feet of gas. Production is to begin by 2003.

"This is very important to us," said Leon Codron, president of Atlantic Richfield Indonesia Inc. "The basis of our business in Asia is natural gas."

The news was also welcomed on Wall Street, as investors bid up Arco shares by $2.88 to a closing price of $77.88 in New York Stock Exchange trading.

But the plans, jointly announced Tuesday in Jakarta by Arco Chairman Mike Bowlin and Indonesian President Suharto, come at a time when worldwide natural gas supplies are plentiful. And several other proposals for competing billion-dollar plants that cool gas to a liquid transportable by ship are underway.

Major projects are on the drawing boards in Nigeria, Australia, Oman, Russia, Trinidad, Yemen and United Arab Emirates, said John Hervey, petroleum analyst with Donaldson Lufkin & Jenrette in New York. Those projects are trying to tie up the same customers, principally in Japan and Korea, with the multiyear contracts that are key to obtaining financing, he said.

"Arco's project is big enough to be economical but it's no layup," Hervey said. "They have a geographical advantage against some of the competitors, but not others, such as Russia."

Additional projects still in preliminary stages would further glut the gas market if developed, including one on the Sakhalin Islands near Japan whose development team includes Exxon, Hervey said.

An Arco spokesman said Tuesday that the new Indonesian field, to be located at Irian Jaya in the east, has not yet lined up any customers.

Arco's Codron said the company is undaunted by the competition.

"The quality of our gas is excellent, the rate of productivity is very good and the location is near major buyers," he said.

Producers are also betting that China, which principally uses coal for its industrial and residential energy needs, will convert to natural gas in coming years. But delivery will hinge on the Chinese spending billions of dollars on infrastructure.

Indonesia, in partnership with Mobil, has always been Japan's largest supplier of liquefied natural gas. And the state-owned Pertamina is the largest liquid gas marketer in the world. But Indonesia's biggest gas field is now in decline, hence the government's push to develop the remote Tangguh field.

Arco said it will have a leading 35% stake in Tangguh, with the rest spread among partners including Occidental Petroleum Corp. of Los Angeles. Pertamina is shouldering the entire cost of the gas liquefaction plant, which might exceed $1.5 billion.

The project is the latest step in Arco's attempt to expand its oil production and development overseas in the face of the steady decline of its Alaskan North Slope fields, its 1980s bonanza.

Those foreign projects have included a huge gas field and pipeline in the South China Sea and an equity stake in the largest Russian oil company, Lukoil.

Last year, Arco began deliveries of natural gas from the Yacheng natural gas field 60 miles off the Chinese coast to power plants in Hong Kong, via a 480-mile undersea pipeline. The Indonesian project could produce triple the Chinese project's daily output, an Arco spokesman said.

Despite Arco's emphasis on overseas development, the company's "breadbasket" now and for many years to come will remain Alaska, the company said, where its two oil fields generate an average 390,000 barrels of petroleum a day, nearly two-thirds of its worldwide production.

Arco's Alaska production has been dropping steadily since peaking at 490,000 barrels in 1988, though the company hopes new finds and improved technology will slow, if not halt, the decline in coming years.

Times wire services were used in compiling this report.

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