OREANDA-NEWS.  July 11, 2014. After seven years of negotiation the government has more than doubled the ceiling price of Tangguh gas sold to China.

Under the revised contract, Chinese state-owned oil and gas firm China National Offshore Oil Corp. (CNOOC) has to pay a ceiling price of US\\$8 for every million British thermal units (mmbtu) of liquefied natural gas (LNG) from the Tangguh plant in Papua starting from Tuesday.

The figure was more than twice the USD3.35 per mmbtu, which had been in place since 2006, after the Indonesian government and the Chinese agreed to change the calculation of the Tangguh gas price by eliminating a cap on the benchmark Japan Crude Cocktail (JCC), Energy and Mineral Resources Minister Jero Wacik said on Monday.

“Fujian agreed to remove the cap last week,” he told reporters after a meeting at the State Palace.

He was referring to China’s province of Fujian, for which CNOOC buys 2.6 million tons of Tangguh’s natural gas per year. The Tangguh LNG plant is 37.16 percent owned by BP, which operates the plant, and 13.9 percent owned by CNOOC.

The original Fujian gas sale agreement was inked during the term of then president Megawati Soekarnoputri in 2002, when the JCC was capped at USD 26 per barrel. The calculation resulted in the Tangguh gas selling price being pegged at USD 2.4 per mmbtu.

Jero said that with the current calculation, which eliminated the cap, the Tangguh gas price would continue to rise along with the increase in oil prices.

“Our contract will last until 2034. By then we will see an average selling price of USD 12, which is four times higher compared to last year’s price,” he said.

With the new pricing scheme, the government expects to pocket USD 20 billion until 2034, far higher than the USD 5.2 billion under the old system.

The renegotiation of the Fujian gas price has been intensified as the government will end its term in October.

The new price of gas to Fujian remains low compared to the LNG price in the global market.

The price, however, is considered reasonable given that the market is anticipating oversupply, which is expected to further push down the price in the future, according to the deputy director at energy think tank ReforMiner Institute, Komaidi Notonegoro.

“This is a long-term contract. There are many gas projects in other countries that will force the price below USD 10 per mmbtu,” he said.

The price for natural gas for July stood at USD 4.55 per mmbtu at 8:31 a.m. on the New York Mercantile Exchange, according to figures compiled by Bloomberg. Meanwhile, the price on the ICE Futures Europe exchange was 39.85 British pence or USD 6.77 per mmbtu. The spot price for LNG bought by Japan — currently the world’s biggest LNG user — was at an average of USD 14.8 per mmbtu in May, Bloomberg reported.

Indonesia is estimated to have quite significant gas resources. Most of the gas is currently sold overseas as a lack of domestic infrastructure has limited absorption by potential local consumers.

The government has been calling for a higher domestic allocation of gas in an attempt to reduce the country’s dependence on imports of oil and related products.