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

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

Indonesia was an early producer of oil
started in the 1870s. Up to the Second
World War, Indonesia produced 148,000
barrels of oil per day (Arndt 1983; Hunter
1966). Indonesian natural gas industry came
to life when it found a large natural gas
field at Arun in Aceh Province in 1971, and
then discovered gas reserves at Badak, near
Bontang in East Kalimantan Province in
1972, totaling about 17.5 trillion cubic feet
(tcf) of reserves (Wijarso, 1985). Badak

exported its first cargo in 1977 while Arun
followed the suit the next year. Badak and
Arun’s export had made East Asia the
world’s largest regional Liquefied Natural
Gas (LNG) market (Nugroho, 2010).

The energy industry boosted
Indonesia’s economic growth during the
1970s and 1980s by accounting around 80%
of the country’s annual exports and 70% of
the central government’s annual revenues
(Rosser, 2007:39). LNG is also Indonesia’s
most significant energy export and has been
its largest foreign exchange earner (Stott,



26 Indonesia-China Energy Trade

2008). Indonesia had been the largest LNG
exporter for nearly three decades since 1977
to 2005, and its peak export was in 1998 for
around 36.1 billion cubic meters (Nugroho,
2010). Indonesia has estimated reserves of
around 9 billion barrels of proven and
potential crude oil and 182 tcf of gas,
according to energy ministry data (Reuters,
22 November 2007).

Profile of Tangguh LNG Project

Tangguh LNG plant project is
Indonesia’s third LNG centre after Badak
LNG plant and Arun LNG plant. Tangguh
plant is located in Berau Bay and fed by gas
field in Manokwari Regency. Tangguh gas
project is developed by a consortium of
Beyond Petroleum Plc., (37.16%), MI Berau
(16.3%), CNOOC (13.9%), Nippon Oil
(12.23%), KG Berau/KG Wiriagar (10%),
LNG Japan Corporation (7.35%) and
Talisman (3.06%) (the Jakarta Post [JP], 31
December 2009). Tangguh LNG plant is
planned to have a production capacity of 7.6
million metric tons (mmt) a year from two
production trains (Hudiono, 2005) The LNG
project fed natural gas from three
production-sharing blocks –the Berau, the
Muturi, and the Wiriagar blocks in
Manokwari regency, which totally
contained 14.4 tcf proven reserves of natural
gas (JP, 9 August 2002). These three blocks
are controlled through Production Sharing
Contract (PSC) by BP Indonesia Plc. which
has 37.5% of the reserves, along with by
Mitsubishi (16%), Nippon Oil Exploration
(12%), British Gas (11%), Kanematsu Corp.
(10%), LNG Japan (1%) and China National
Offshore Oil Corporation (CNOOC) which
has 12.5% stake in the gas fields (JP, 30
September 2002).

Until 2009, The Tangguh LNG plant
operator has signed multi-year contracts to
supply LNG to several buyers, including to

CNOOC, which is serving the Fujian
Province’s LNG Terminal in China for the
amount of 2.6 million ton per annum (mtpa)
for 25 years contract. Another one is with
Korea's steel company, POSCO and Korea’s
Electric company, K-Power for a total of
1.15 mtpa for 20 years of tenure (Alfian,
2009). The LNG export contract to Fujian
was the first contract made with Tangguh
operator. It was expected to generate a total
of USD8.5 billion revenue for 25 years
contract period while its two trains total
production capacity, will generate USD 21
billion in revenue over the same period.
Initially, BP and its partners had planned to
install four trains at the Tangguh plant,
which will generate USD 45 billion in
revenue (JP, 30 September 2002). The
revenue will be distributed to the
Indonesian central government, the Papua
province and BP with its consortium
partners. Under a PSC, BP and its partners
would keep 30% of all revenue and give the
remaining 70% to the government. Then
according to the Intergovernmental Fiscal
Balance Law No. 25/1999, the central
government has to hand over 30% of the
revenue to the Papua province (JP, 27
December 2002).

Statement of the Problem

Referring to Krasner (1976), there are
four major state interests in the
international trade: (1) political power; (2)
aggregate national income; (3) economic
growth; (4) and social stability. Focusing in
international energy trade, it related to
‘energy security’ which has been debated
particularly concerning the transnational oil
markets. Moreover growing demand of gas
in the global market will force consumers to
put big concern of a vital gas supply.
Emerging cooperation among gas
producers and major energy consumer



Journal of ASEAN Studies 27

countries will shape a new geopolitical
considerations that strongly influence the
highest levels of economic and security
policy.

Energy importer country like China that
commit to fulfil its large quantity of gas, put
its energy security systems partly in the
hands of the exporters, which will give both
of the two parties a stake in each countries’
domestic political stability. Thus, the
‘geopolitics of gas’ is not simply a struggle
for global position, but also “the immensely
political actions of governments, investors,
and other key actors who decide which gas
trade projects will be built, how the gains
will be allocated, and how the risks of
dependence on international gas trading
will be managed” (Barnes et al., 2006: 4-5).

The focus of this study is to investigate
Indonesia’s LNG export from its Tangguh
plant to Fujian Province in China. The
export contract was signed in August 2002
to supply 2.5 mtpa of LNG for 25 years in
tenure. Under the contract, the crude oil
price –as the LNG checking price—was
packed in maximum price of USD25/barrel,
but the oil price had risen since early 2005
and it reached above USD100/barrel during
2007-2008. It means, the original contract
only valued USD2.67 per million British
thermal unit (mBtu), although in fact in
2008 Indonesia could even sell its LNG for
USD20/mBtu to South Korean companies.

The major emphasis of this study will be
on the Indonesia’s interests in exporting its
LNG to China. This study will particularly
investigates Indonesia’s interests that drove
its LNG export from Tangguh plant to
China, and the context that shaped the
process of LNG trading tender/negotiation.
Some research questions are addressed
here. What interests drove Indonesia to
export its LNG? Is there a certain political
interest behind the deal? How did the
domestic context shape Indonesia’s attitude
and its bargaining position during the
negotiation of Fujian LNG contract? How

did the global energy market shape
Indonesia’s assumption in accepting LNG
pricing formula?

Since this research aims to reveal the
dynamics of the international energy trade
in depth and in detail, not shallowly and
broadly, the naturalistic approach seems to
be more suitable for this research. In
addition, the existing data tend to be
qualitative in nature as they are derived
primarily from news in the mass media and
interview with the resource person. This
research largely uses a qualitative approach
because it focuses on the detailed critical
aspects using case study on a particular
international energy trade. The data are
collected using qualitative method, to be
discursive and concerned with a
comprehensive account of some event or
unit. Although it has a small number of
cases, qualitative researchers generally
discover abundant information from the
research. Sometimes this research is linked
with area or case studies that focus on a
particular event, decision, institution,
location, issue, or piece of legislation (King,
Keohane and Verba, 1995:4).

This research is more likely to
incorporate an inductive approach and let
the data speaks for themselves. This study
is multi-method in focus, involving an
interpretive approach to its subject matter.
Therefore, by deploying a wide range of
interconnected methods this approach not
only helps in developing a more holistic
view, but also facilitates explanation and
prediction (Denzin and Lincoln, 1998). The
main tool for data collection in this research
is the analysis of secondary data, supported
by a qualitative interviewing as well as
internal documentation (documents of the
contracts, etc.). Data analysis is conducted
towards the news from several highly
credible English newspapers and magazines
as well as online websites, such as The
Jakarta Post (most read English-language
newspaper in Indonesia), Antara News



28 Indonesia-China Energy Trade

(Indonesia’s biggest news services in terms
of subscriptions), Tempo magazine English
Edition (most popular magazine in
Indonesia), Bloomberg, Reuters, and People
Daily English Edition (Chinese
government’s media). An exploratory
interview is also conducted with an energy
expert and senior policy maker in energy
sector in Indonesia. The interviews explore
the context surrounding Indonesia’s LNG
export to China, interests that shaped
Indonesia’s policy to export its LNG, and
suggestions of Indonesia’s policy response
to gain its national interests through energy
cooperation with China.

Indonesian Government and LNG
Marketing to China

Soon after taking over from the
authoritarian Suharto’s regime, President
Habibie’s administration (May 1998-
October 1999) prioritized Tangguh LNG
project over other LNG projects across the
country, including the expansion of Badak
LNG plant, development of Donggi-Senoro
LNG project and East Natuna LNG project
(JP, 14 June 1999).

President Abdurrahman Wahid
continued implementing the policy and was
involved personally in marketing the
Tangguh project. He was eager to offer the
LNG particularly to key player states in the
Asian LNG market (JP, 13 June 2000).
Wahid put China’s LNG market on top of
his list among others due to the country’s
fast growing demand of energy. China is
the second largest energy importer after the
US. Wahid visited China and sent his
Minister of Energy Yudhoyono to find
buyers for the project in China. From the
beginning, efforts to sell Tangguh LNG to
China were conducted with a government-
to-government approach involving a state-

owned energy company, Pertamina (JP, 30
May 2000).

President Megawati Soekarnoputri, who
took office in July 2001 used any available
means to sell Tangguh LNG to China
through a tender for Guangdong Province
LNG project. As the competition for
Guangdong LNG contract between
Indonesia and Australia heated up, leaders
of both countries took turn to visit China to
win over the preference of the Chinese
government.

President Megawati visited China and
lobbied the Chinese leaders to secure the
Guangdong LNG contract. In March 2002
Megawati made a state visit to China
accompanied by her husband, Taufik
Kiemas, a large number of her ministers
and over 100 Indonesian businessmen.
Australian Prime Minister John Howard
also lobbied the Chinese leaders to win the
LNG project during his visit to China (JP, 9
August 2002).

President Megawati and her Chinese
counterpart, President Jiang Zemin,
performed a dance together for six minutes
during a state dinner. The event was widely
seen as dance diplomacy by Megawati to
sell Tangguh LNG to China (JP, 25 March
2002). She also hosted another summit with
Chinese Prime Minister Zu Rongji in
Jakarta. On top of that, she sent her
husband Taufik Kiemas to lead a
government delegation that comprised
some Cabinet members to persuade Beijing
to reward Indonesia with the Guangdong
LNG contract (JP, 21 August 2002).

However, on 8 August 2002, on the
same day with the 12th commemoration of
the normalization of Sino-Indonesian
diplomatic relations, China announced a
decision eagerly awaited by Megawati. The
USD13.5 billion contract to supply 3 mtpa of
LNG for Guangdong terminal was awarded
to a consortium of Australia’s energy firms
(JP, 9 and 21 August 2002).



Journal of ASEAN Studies 29

The date was only coincidence.
However, as a largest LNG exporter, this
was Indonesia’s first failure to win the
contract. It was very disappointing because
Indonesia was so desperate for foreign
exchanges to cover its budget deficit (JP, 12
August 2002). But surprisingly, China also
announced a ‘consolation prize’ for
Indonesia without tender process. China
offered Indonesia to become a sole bidder
for another LNG project in Fujian province,
a smaller contract that’s expected to value
USD10 billion to supply 2.5 mtpa of LNG to
Fujian Province (JP, 9 August 2002).
However, the signed contract only valued
USD8.4 billion for 25 years of long term
export (JP, 26 September 2002).

Context of Global LNG Market and the
Tender

During Guangdong LNG tender in 2002,
the global LNG market was declining.
Energy supply was abundant and the
energy commodity price was very low. The
competition among exporters was very
tight. This situation was explained by
Indonesian Minister of Energy Yusgiantoro
that the arrival of new players from
Malaysia, Australia, Brunei Darussalam and
Qatar in the late 1980s has changed the
regional LNG market's structure from a
‘seller's market’ to ‘buyer's market’ (JP,
12August 2002).

The ‘buyer’s market’ happened when
the amount of supply in the energy market
was higher than demand. The declining
market was formed by the scaling down of
industrial operation in most Asia’s
developing countries. It was marked by the
ceasing of manufacturing machines that left
a big amount of energy supply in the stock
pile. Although, just before the crisis, most of
LNG producers have increased their LNG
production capacity to meet high demand

of energy triggered by Asian economic
growth.

The decline in demand caused an
oversupply condition in the LNG energy
market. The oversupply did not only scale
down the number of LNG markets, but also
forced the contract of LNG trading to be
rescheduled due to the fact that most of the
LNG contracts were intended for long term
deals ranging from 20 to 25 years.

They faced a totally unprecedented
condition. All of the importing countries
had an oversupply situation and too many
contracts. These unstable market situations
have also brought about different
calculations on the buyers’ side. Although
they were favored by the ‘buyer’s market’
condition, they prefer to have short term
LNG contracts as they took a wait-and-see
approach to long term contracts. In their
opinion, short term contracts offered better
flexibility in dealing with the period of
uncertainties. Therefore, the energy market
was flooded by ‘short term’ contracts or
buyer’s preference to buy small quantities
(JP, 11 April 2001). That is because the
buyers did not want to be tied with long-
term contracts and therefore the buyers
became more and more demanding and the
competition became tighter (JP, 9 December
2000).

The condition continued until the
second half of 2004, when energy market
was still dubbed as ‘buyer’s market’.
Demand for Indonesia’s LNG from its
traditional buyers, like Japan, South Korea
and Taiwan, was still running in the lowest
curve. In fact, in order to extend the current
contracts to supply some 12 mtpa to Japan
that will expire by 2010, Indonesia was
considering a request from the Japanese to
lower the price, as part of a strategy to
maintain its customer loyalty (JP, 10
December 2003). This marketing strategy by
decreasing the price was also applied to
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
2004).

This ‘buyer’s market’ condition
dominated the global energy market from
the peak of Asian economic crisis until the
second half of 2004. This is the background
of China’s tender for the Guangdong LNG
project, which drew bidders from six
countries –Indonesia, Malaysia, Russia,
Australia, Yemen and Qatar (JP, 9 August
2002). It is assumed that this energy market
context had influenced the China LNG
tender process.

Domestic Context and the Tender

It is very important to understand the
political economic context in Indonesia
during the Fujian LNG bidding process.
Prior to the bidding, Indonesia was the last
country in Asia to recover from the
economic crisis started in 1997. Not only did
it hit hard Indonesia’s financial sector, but
also triggered a broader, systemic political
reform. The crisis created a momentum to
bring down the authoritarian regime of
President Soeharto and provided a period
of transition which changed an
authoritarian system into democracy.
During the transition, political liberalization
also opened a tight power competition
among elites. Provinces outside Java Island
abundant with natural resources demanded
full autonomy and even campaigned for
independence.

One of the richest provinces but always
marginalized, Papua, intended to break
away from Indonesia. Responding to this
demand, Indonesia should deliver a quick
and concrete action to solve the unrest in
Papua. The problem would bring the
domino effect to other provinces, especially
after East Timor was separated from
Indonesia. The main concern of the
insurgents in Papua was demand for justice

and welfare from the central government,
particularly for larger shares in the
revenues from the exploitation of their
natural resources (JP, 13 June 2000).

In this domestic context, development of
the Tangguh LNG project was expected to
be a strategic step in order to solve the
problem. It was expected, by exporting
Tangguh LNG, Indonesia would receive
sufficient money to finance development in
the province with 2.3 million populations.
Furthermore, the development was
expected to push the economic growth and
bring a multiplier effect in the development
of various basic infrastructures.

The LNG project itself was expected to
provide at least 3,000 job opportunities
during the construction and 1,000 would be
permanently employed in the plant's
operations. The central government had
been guaranteeing a fairer share through
the Special Autonomy Law of Papua. The
law guarantees the province to get 30% of
the revenue from the LNG project and 70%
will be for the central government (JP, 30
September 2002).

Competition among the Energy
Companies

Another issue that also rose during the
Indonesia’s bidding of Guangdong LNG
project was the competition among the
multinational companies. They were mostly
the investors of Badak LNG plant in East
Kalimantan –led by French firm Total Fina
Elf and American firms Unocal Indonesia
and Vico Indonesia— who asked Pertamina
to sell LNG from Badak to China. The
investors of Badak plant wanted to sell their
LNG to China since their plant was already
developed and had been serving
international market for decades. They also
proposed to build the ninth train in the
Badak plant (JP, 25 July 2001).



Journal of ASEAN Studies 31

They argued that exporting LNG from
Badak would be cheaper than from
Tangguh plant, because Badak LNG was an
expansion project while Tangguh was a
new one. Investors of Tangguh would need
to spend full investment to build
infrastructure and other supporting
constructions, while Badak project would be
more efficient because it would only need to
spend money for expansion project.

The efficiency would help Indonesia’s
position to give more competitive price for
the potential customers. Badak investor’s
reason on the competitive price was
relevant with the buyer’s market condition
at that time. Indonesia’s chance to win the
Chinese LNG supply contract would be
greater if it proposed to supply LNG from
Badak plant (JP, 25 January 2001).
Pertamina President Baihaki Hakim argued
that Tangguh LNG could be less
competitive, because construction of the
plant had not begun yet, which raised the
cost of selling the LNG (JP, 11 April 2001).

Meanwhile, the Indonesia’s bidding of
Guangdong was also followed by the
competition behind the screen between
Pertamina and BP. Pertamina was no longer
the sole seller for Indonesia’s LNG for
international market and was replaced by
BP, although during the Habibie
administration, Pertamina was appointed to
market Tangguh LNG to China (JP, 14 June
1999). The change of the market leader from
a state owned company to a foreign
company was allowed by the new Oil and
Gas Law, Number 22/2001 that stipulates
foreign contractors are allowed to market
their production (The State Secretariat of the
Republic of Indonesia, 2001).

The appointment of BP to market
Tangguh LNG to China was followed by a
controversy. BP failed to compete with the
eventual winner, an Australian consortium.
Analysts argued that appointing BP to
spearhead Indonesia’s marketing effort was
a mistake. Pertamina should have done the

job as it had marketing experience for
decades. An analyst, Hutapea, said despite
the extensive corruption within Pertamina
over the past decades, Pertamina had
succeed in putting Indonesia as the world's
largest LNG exporter and maintained
Indonesia's leadership in the Asian LNG
market for decades. He said the government
had made a mistake by allowing BP to lead
the marketing, “The government made a
blunder by distrusting Pertamina” (JP, 12
August 2002).

Hutapea said the problem was the
security of supply. He further explained
that since the Tangguh plant had not
developed yet, China doubted the
continuity of supply from the Tangguh
project. They might fear other LNG plants
could not be responsible to ‘help’ Tangguh
in case of troubles given the fact that China
would deal with BP, rather than Pertamina.
“Had Pertamina led the marketing effort,
China would not have been overly worried
about the security of supplies because
Pertamina also manages the Arun and
Badak plants” Hutapea argued. China
prefers to be served by Pertamina as it has
been reliable exporter of LNG since 1970s.

Meanwhile, BP perceived as the
relatively new player in Asian LNG market,
and more importantly it did not has any
authority to two other LNG plants that
already operated for years (JP, 12 August
2002). Pertamina’s position was assumed
stronger in the LNG market because it has
full authority in two other LNG plants.
These authorities were very important to be
able to guarantee continuity of the LNG
supply to the importer. As an example,
when LNG production at Arun plant in
Aceh was disrupted, Pertamina could easily
secure the continuity of supply by deliver
its reserve capacity from Badak plant in
Kalimantan. In fact, BP did not have such
ability to guarantee security of LNG supply
to the importer.



32 Indonesia-China Energy Trade

It was the first time a foreign contractor
led an Indonesia’s LNG marketing team.
However, after assessing the failure to win
Guangdong contract and considering
China’s special offer of Fujian LNG project,
the government assigned a marketing team
led by senior Pertamina official to follow up
the offer. The team comprised three
Pertamina officials and president of the
Tangguh project, Gerald J. Preeboom from
BP. Successfully the Fujian contract was
signed in August 2002 by Pertamina, not BP
(JP, 20 August 2002).

Following its ‘success’ to secure the
Fujian contract, Pertamina intensified a
campaign to regain its previous status as
the sole seller of Indonesia’s LNG. An
Indonesian analyst argued that Pertamina’s
status as marketing leader would improve
Indonesia performance to compete in the
market because Pertamina had full control
of the other two LNG plant. It in turn
would assure the security of supply,
something that BP did not have. However,
other contractors were not enthusiastic
about the campaign as they argued that the
single seller scheme would be unfair for
LNG players in Indonesia, with Pertamina
no longer the regulator but rather a market
player (JP, 19 September 2002).

In the wake of competition among
contractor companies, the Oil and Gas
Implementing Body (BP Migas) has
appointed Pertamina as the sole marketing
agent for Indonesia’s LNG to Japan,
Indonesia's largest LNG importer. The
appointment was for scheduling BP Migas’
proposal on the extension of Japan LNG
import contract that would due in 2010 (JP,
10 May 2004).

Pertamina was also asked to market the
LNG to South Korea and Taiwan. In late
May 2004, Pertamina regained its status to
lead Indonesia’s LNG marketing team. The
head of BP Migas announced that they had
finished terms and conditions for the

appointment of Pertamina as sales agent
with other LNG producers such as Total,
Unocal, Vico and BP Indonesia for
Tangguh.” (JP, 28 May 2004).

Learning from the competition among
contractor firms, the government has
considered to set up an ‘Indonesia Inc.’,
which would position the authority to
market Indonesia’s LNG. The body, whose
goal would be to help Indonesia retain its
position as a top LNG producer, would
consist of BP Migas, Pertamina, the
Indonesian Gas Association and contractors
(19 September 2002).

However, the Tangguh LNG export
contract for Fujian did have a problem that
would explode in the following days. The
problem was about pricing formula that
caused huge lost to Indonesia, because the
contract involved a crude oil check price at
USD25/barrel as the ceiling price for the
Tangguh LNG for Fujian. Some economic
and political issues emerged around the
controversial Fujian contract.

Problems over the Fujian LNG contract

Market condition that has been called
‘buyer’s market’ has made the competition
very tight. It is very tough when each of the
LNG exporting countries had to compete by
employing all possible means available to
win LNG supplying contracts. However,
various measures deployed to win the
export contracts must put a national interest
on the top priority above all calculation and
interests.

Various ways to attract potential buyers,
including giving a big discount for LNG
price, should be calculated in order to gain
long term interest. Pricing of energy
commodity in the international market
always fluctuates. Sometimes the price
drops because of economic, politic or
security issues, but at other times the price



Journal of ASEAN Studies 33

can be very expensive because of these
contextual variables. As the nature of fossil-
based energy is very limited and could not
be renewable, the general trend of fossil
energy price should be higher in the future.
“The negotiator team had acted against the
law of nature by assuming the fixing price”
said Kurtubi, an energy expert in Jakarta
(Iswara, 2008).

Based on this reason, the Fujian LNG
contract raised some question on the
‘abnormality’ of the contract. But since the
contract was won during the frustrated
situation for Indonesia, the direct
appointment as the sole bidder without
tender was perceived as the ‘consolation
prize’. However the ‘consolation prize’ had
raised a public suspicion on the unfair
transaction since its early stage.

The suspicion was raised as the
Indonesian government was not
transparent in announcing the Tangguh
LNG export price to Fujian Province
although some experts and politicians had
questioned the issue. The Indonesian
government was seen to keep something
behind public eye while in August 2002
Minister Yusgiantoro was still in
preparation to send a task force to clarify
the contract with the Chinese government.
Even until second half of September 2002,
the price of LNG export to Fujian was still
in question. Having failed to win
Guangdong contract, also with unclear
details of the Fujian contract, the Indonesian
government nevertheless speculatively
declared that the result of the bidding was
good enough for Indonesia (JP, 7 September
2002).

Responding to that progress, many
experts and politicians criticized the
marketing team’s ability and started
questioning whether the largest exporting
country was still competitive in the future.
“Indonesia's LNG industry is now facing a
doubtful future,” Ramses Hutapea, an
energy analyst said (Simbolon et al., 2002).

Critics also questioned the involvement
of the president’s husband, Taufik Kiemas
who led Indonesian delegation to ‘lobby’
Chinese policy makers. The rumors in
Jakarta speculated that Kiemas himself had
been possibly taking profits from the
‘marketing activities’ (JP, 21 August 2002).

Indonesian government used the
‘consolation prize’ to forget the frustration
for its failure to win the Guangdong LNG
tender. The Indonesian government used
the Fujian contract to answer various critics
following the failure to win the Guangdong
contract and later other failure to win
respectively Korea and Taiwan contracts.
Therefore, the suspicion on the ‘unusual’
terms and conditions in the Fujian contract
could be ignored. Moreover, the price of
energy commodity was very cheap, so the
formula of the contract could seem normal
(Simbolon et al., 2002).

The suspicion was justified three years
later when the market shifted to ‘seller’s
market’ and energy commodity price hiked
in 2005. Again, in answering the suspicion
on the Fujian contract detail, the then
Minister Yusgiantoro said that it was a
‘consolation prize’ after Indonesia failed to
win Guangdong LNG contract and extend
export contract to its traditional LNG
importer such as Japan, Korea and Taiwan
(Simbolon, et al., 2002).

Minister Yusgiantoro explained that the
offer for Indonesia to act as a sole bidder for
Fujian LNG project was already tied with
the specific terms and conditions. One of
the terms was to put the maximum crude
oil check price of USD25/barrel as the
ceiling price, which meant that the highest
LNG price to be exported to Fujian would
be only USD2.67/mBtu for a period of 25
years. It meant that the negotiators assumed
the crude oil price would always be below
USD25 for period of 25 years.

The ceiling price has limited the
fluctuation of the LNG price. If the current
crude oil price is around USD75 to



34 Indonesia-China Energy Trade

USD80/barrel, then the LNG price should be
around USD12 to USD15/mBtu. Let us
compare this with the price in the Fujian
contract. The contract that involves 2.6 mtpa
of Tangguh LNG for Fujian puts Indonesia
in a huge lost (Kurtubi, 2007).

The use of price ceiling has been
perceived as a big problem because it will
cause a massive lost for Indonesia, almost
USD8 billion in a period of 25 years of
export to Fujian. This reality is very hard to
swallow. Since Indonesia’s current status as
a net oil importing country, it has to import
crude oil at expensive price, but at the same
time sells LNG at very low price. Importing
crude oil is quite costly as Indonesia always
subsidizes oil price for its domestic market.

The reactivation was followed by the
increase of energy demand in the global
market. However, the oil price hike in the
global market did not affect significantly the
Indonesia’s exported LNG price for Fujian,
China. It caused Indonesia to suffer a huge
lost in its foreign currency since its LNG has
been exported to Fujian far below the
market price.

The lost was caused by the imposed
pricing formula that restricted LNG price
with maximum equivalent to oil price of
USD25/barrel. Indonesia’s LNG price for
Fujian could not climb in line with the oil
price in the market and ultimately
Indonesia as an LNG exporter could not
benefit from the momentum. This was
frustrating since the oil price could not push
Indonesia to raise LNG price for Fujian.

The situation raised reaction among
Indonesian political elites. Various
discourses on the issue surfaced such as
‘resource nationalism’, demand to cancel
the Fujian LNG contract at all cost, and idea
to do more rational measure by
renegotiating the contract. A visionary idea
that gained strong support was the demand
to review the energy export policy and to
change it into one that prioritizes the

natural resources to meet domestic energy
demand.

The ‘rising oil price’ and the irony of
pricing formulation in LNG export contract
to Fujian have raised a discourse on
‘resource nationalism’. However it did not
force the Indonesian government to
nationalize foreign energy companies as in
Venezuela and Bolivia. This is despite the
fact that the idea is based on the vision to
use the natural resources for the full benefit
of the people (Soesastro, 2007).

In the practical terms, the idea is about
to prioritize the Indonesia’s national energy
and mineral companies, to explore, to
product, to refine and to distribute or to
market the resources as long as the
companies can do them by themselves.
Then the national companies are allowed to
invite other international companies to
manage the resources that the national
companies are unable to manage. But, the
basic rhetoric is about to free Indonesia
from the exploitation of the so called ‘new
colonialism’.

Another disappointment from the
Fujian contract was the demand to cancel
the contract and find other potential LNG
importers who could give more benefit for
Indonesia. This is because some analysts
have argued that the contract could be
cancelled and this scenario was actually
accommodated by the agreement. As the
maximum penalty for such eventuality is
USD300 million, cancellation makes
financial sense, rather than suffering lost for
around USD75 billion in 25 years (Iswara et
al., 2008).

Following the situation, Indonesian
government preferred to renegotiate the
Fujian contract and to conduct more active
effort to pull China’s investments and loans
to Indonesia. The investments and loans
become highly important since Indonesia is
in deep concern to build its energy and
infrastructure projects. Another measure



Journal of ASEAN Studies 35

that was conducted at the same time is to
review the policy of raw material export so
that commodities will be for domestic
consumption or the process of the material
will be inside the country.

The demand for renegotiation was very
rational since the LNG pricing formulation
normally reflected the progressive price of
crude oil in the global energy market (Stott,
2009). There must be no certain limitation to
the oil price that serves as the standard or
checking price to formulate Tangguh LNG
price. The maximum fixed price of the oil
price was unusual in the global LNG
trading and this price fixing also never
happened before.

Ironically, considering the hike of crude
oil price in the global market during July
2008, when it reached its top position in
USD147/barrel, the price of LNG in the
global market should be mirrored around
USD20/mBtu. At that time, an energy
analyst, Kurtubi, estimated that such
pricing difference would cost Indonesia
USD3 billion annually (Iswara et al., 2008).
Meanwhile, when the crude oil price in the
market is moving around USD100/barrel,
therefore the normal price of LNG in the
global market should be four times higher
than the Indonesia’s LNG price for Fujian.

While the renegotiations could cause a
rift in China-Indonesia relations, it is
undeniable that Indonesia has what China
needs, large deposits of natural resources
(Stott, 2009). Meanwhile, President
Yudhoyono changed Indonesia’s strategy
by pushing for enhanced energy
cooperation with China, especially in the
construction of power plants and
infrastructure under the concessionary loan
scheme. Indeed, energy cooperation is an
important part of the Sino-Indonesia
relations, similar to Beijing’s growing ties to
other resource-rich developing countries in
Africa.

Having suffered a huge lost from the
Fujian contract; Indonesia now has learnt to

control its tendency to easily export its
natural resources. On the other hand, to
meet domestic energy demand, the
government should change its policy by
prioritizing the gas for domestic demand
than exporting it. Since Indonesia is a net oil
importer, it has been importing oil that is
more expensive than the gas price.

Moreover, the government still
subsidizes oil retail price that costs more
than 10% of Indonesia’s national budget. A
prominent energy expert and member of
National Energy Council, the late Widjajono
Partowidagdo, in an interview with the
author, said “It is very stupid to export the
cheaper one –LNG—and importing the
expensive one –oil, that is simple”
(Partowidagdo, 2010).

That logical way of thinking influenced
some of the top policy makers, and the
victory of the duet of Susilo Bambang
Yudhoyono and Jusuf Kalla, in the first
direct Indonesian presidential election in
September 2004, has “altered the political
landscape with regard to LNG export”
(Stott, 2008). That is right what Stott has
mentioned, since Indonesia restores its post-
crisis economy and increases its
competitiveness in the global market;
Indonesia must seriously increase the
added value by processing its natural
resources inside the country.

That was one of the priority programs of
the Yudhoyono-Kalla administration, who
prefer to push development of resources-
based industry and to minimize export of
raw materials commodity. Actually, by
tracing Indonesia’s energy policy through
history, the policy to prioritize domestic
energy demand had risen since 1977 when
Soeharto administration (1967-1998)
handled Indonesia’s early industrialization
in 1970s that needed a big amount of energy
supply.

In the mining sector, new legislation
was passed in 2009 which required mining
firms to process all mining products into



36 Indonesia-China Energy Trade

metal locally instead of just exporting the
raw materials abroad. These policies affect
China because, besides its energy needs,
China’s economic growth needs Indonesia’s
raw materials. To meet its industry
demand, China will continue its
dependence on Indonesia’s material supply
from large bauxite field in Kalimantan.
However, the Indonesian parliament
discussed banning future bauxite exports in
favour of refining its own bauxite to
alumina domestically (Stott, 2008).

After being widely questioned and
renegotiated in 2006, the Fujian contract
issue was raised again. In domestic context,
politicians was also used this controversial
issue as a ‘political weapon’ to attack their
political opponents. Competition among the
politicians intensified when the election was
around the corner. In order to get popular
support they launched a political attack
against their rivals. This section will
particularly discuss the domestic political
context and its dynamics regarding the
controversial LNG export contract to Fujian
that was signed when Megawati acted as
President of the Republic of Indonesia from
July 2001 to October 2004.

The political structure in 2008 already
changed, compared to the time when the
Fujian contract was signed. At that time,
Megawati, who failed to stay in power after
the 2004 election, brought her party as an
opposition power to the government. On
the other side, both Yudhoyono and Kalla,
who were the cabinet members of Megawati
administration, was in power after
defeating Megawati in 2004 presidential
election.

In 2008, one year before the legislative
election in April and presidential election in
July 2009, Indonesia’s political tension was
high. The opposition leader, Megawati, and
her party (PDI-P, Indonesian Democratic
Party of Struggle) aggressively pushed a
parliamentary enquiry to investigate the

government decision to cut subsidy for fuel
price in the domestic market. To balance the
power exercise, the Golkar Party that had a
majority of seats in the parliament and was
led by the then Vice President Jusuf Kalla,
was very eager to criticise Megawati’s
decision to export Tangguh LNG to Fujian
at a very low price. The aim of the Golkar’s
manoeuvre was to raise public awareness
that Megawati had bequeathed a big
problem by deciding an export contract.

In countering this political attack,
Pramono Anung, Secretary General of PDIP
warned Yudhoyono and Kalla that since
both of them were members of the
Megawati administration from 2001 to 2004,
Yudhoyono and Kalla could also be
responsible for formulating the policy.
Politicians in the parliament also confirmed
that the Fujian LNG contract could be
politicised and “become an effective
bargaining position” said Alvin Lie, a
politician outside the two confronting
groups who posted in Commission on
Energy (Iswara, 2008).

Beside the political issue, Tangguh LNG
problem also had a big magnitude and was
discussed by various segments of people.
This issue could also be an entry point for
the businessmen to require sufficient energy
supply to operate their industry machines.
Meanwhile, it also touched the public
sensitivity since they suffer from periodical
black-out as the state-owned power
company did not receive sufficient energy
to produce electricity. Moreover, the
government was unable to build
infrastructure and other public facilities
because a large amount of its budget must
be allocated to subsidize fuel price in
domestic market. In the 2010-2011 budget,
the subsidy is allocated for around 150
trillion of Indonesian Rupiah (USD18
billion), or more than 10% of the total
national budget (Partowidagdo, 2010).



Journal of ASEAN Studies 37

In August 2008, Kalla claimed that the
Fujian’s present formula would totally
suffer Indonesia of USD75 billion. He then
asked the House of Representatives (DPR)
to review the Fujian contract and the
Supreme Audit Agency (BPK) would
supposedly investigate the country’s lost on
it. Kalla saw the formula was the worst in
the history of Indonesia’s energy industry
(Iswara et al., 2008). Kalla urged, "So, the
House has to investigate the Tangguh LNG
contract because this contract is the most
dangerous. This contract is the worst so far."
(JP, 24 August 2008).

Conclusion

Revisiting the Research Question

As a form of international trade,
Indonesia’s LNG export to China has a set
of interests, as mentioned by Krasner (1976),
namely, economic growth, aggregate
national income, social stability, and
political power. These interests have been
reached through a set of measures
conducted by the government as discussed
above. Discussion and analysis are
provided in order to show Indonesia’s
interests and how the government manages
them through answering the research
questions.

What interests drove Indonesia to
export its LNG? Is there a certain political
interest behind the deal? This paper
explains that the development of the
Tangguh LNG project was expected to be a
strategic step in order to solve the social and
political stability in Papua Province. It was
also expected, by exporting Tangguh LNG,
that Indonesia would receive sufficient
money to finance development in the
province with 2.3 million populations.
Furthermore, the development was
expected to push the economic growth and
bring a multiplier effect in the development

of various basic infrastructures. The LNG
project itself was expected to provide at
least 3,000 job opportunities during the
construction and 1,000 would be
permanently employed in the plant's
operations.

How did the global energy market
shape Indonesia’s assumption in accepting
LNG pricing formula? How did the
domestic context shape Indonesia’s attitude
and its bargaining position during the LNG
contract was negotiated? This paper also
discusses Indonesian Minister of Energy
Yusgiantoro’s explanation about the
changing LNG market's structure from a
‘seller's market’ to ‘buyer's market’ that
dominated the global energy market since
the peak of Asian economic crisis until the
second half of 2004. As the background of
China’s tender for the Guangdong LNG
project, it is assumed that the global energy
market had influenced the China LNG
tender process.

As mentioned above, Indonesia’s
interests had shaped its LNG export to
China. This paper also discusses that the
Fujian LNG contract was received during
the frustrated situation for Indonesia
following the failure in the Guangdong,
Korea, Taiwan, and Japan. Hence, the
contract was perceived as the ‘consolation
prize’. This part later discusses suspicion on
the involvement of Indonesian president’s
husband, Taufik Kiemas who led
Indonesian delegation to ‘lobby’ Chinese
policy makers and possibly taking profits
from the ‘marketing activities’.

Lesson learned

There are several things that can be
learned from Indonesia’s LNG export to
China. First, in pursuing state’s interests
through international trade, the government
should also consider the global market
condition in the future. This is because the
global market is always dynamics,



38 Indonesia-China Energy Trade

particularly energy commodity prices that
always fluctuates and is influenced by the
economic, politic and security situations,
besides speculation in the future market.

The negotiators in international trade,
particularly in exporting LNG, should be
careful in formulating the export price,
since LNG prices are not internationally
standardized. There are differences in every
single trader and they vary by region of
destinations, although the LNG price
mostly refers to the crude oil price in the
spot market (Girianna, 2009). Learning from
the Fujian pricing formula that restricted
Indonesia’s LNG price to a very cheap
price, it would be better to use a progressive
pricing formula instead of using ceiling
price or putting an upper limit for the LNG
price.

Second, before releasing energy export
policy, the government should consider its
own country’s domestic demand first. The
government should give priority to
generating its own economic development
by allocating the energy for domestic need.
It is an irony that while Indonesia was
exporting most of its LNG, its local industry
was suffering because of its lack of energy
supply. Moreover, the government has to
import oil and subsidize the oil retail price
that costs more than 10% of Indonesia’s
national budget. Concerning this situation,
a member of Indonesia’s National Energy
Council said “It is very stupid to export the
cheaper one –LNG—and importing the
expensive one –oil” (Partowidagdo, 2010).

The policy to prioritize domestic energy
demand will strengthen the country’s
industrial capability. In turn, this condition
will create more job opportunities, give
added value to its manufactured products,
and offer further value from its export in a
better form rather than in raw materials.
Third, in managing state’s interests, the
government should be consistent toward its
bigger mission, not being trapped in such

temporary circumstances. The compass for
government is neither a particular political
interest nor a short-term domestic political
competition. Instead it should be to pursue
a state’s political power, aggregate national
income, economic growth, and social
stability. It is also required to maintain
stronger cooperation with its partners in
international trade, in this case Indonesia
and China. Moreover, the partner is the
emerging economic and military power that
will strategically influence the regional
stability where Indonesia is also situated.

About Author

Muhammad Badar is the Head of
Department of Political Science, Bakrie
University. His research interest is in
the political economy of energy
security. He can be contacted at
muhammad.badaruddin@bakrie.ac.id.

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