Checking contractors’ expenses

ASEAN, China negotiate, face new challenges

Makmur Keliat, Jakarta

What has China achieved in its relations with ASEAN in the last 15 years? It might be far-fetched to call its achievements remarkable.

 But there are a number of reasons for saying so. In the field of security cooperation, for instance, China has  agreed to the establishment of a code of conduct in the South China Sea.

 The country also has acceded to sign the Treaty of Amity and Cooperation (TAC). Policymakers in Beijing have attached much importance to the regional norms of peaceful conflict resolution strongly upheld by ASEAN.   

 In the field of economic cooperation, significant changes have been taking place as well. This can be seen from the agreement on establishing China-ASEAN Free Trade (CAFTA). It is worth noting that China and ASEAN have planned to fully realize the CAFTA in the year 2011. The signing of CAFTA has pressured Japan and South Korea to have similar free trade agreements with ASEAN.

 Related to this, China, by utilizing the mechanism of ASEAN+3, is trying to promote the idea of an East Asia Free Trade Area (EAFTA).

 Though in the context of the ASEAN+3 mechanism, EAFTA has been categorized as a medium to long-term recommendation, meaning there is no hurry to realize it, China has taken the initiative to launch a feasibility study on it.  

 Serious efforts also have been made by China to strengthen financial cooperation in the region. China has attempted to sign bilateral swap arrangements (BSA) with all member countries of ASEAN. With a view to providing financial assistance for countries facing short-term liquidity crisis, the total amount China has pledged to support the BSA facilities is estimated to be US$20.5 billion. 

 By actively supporting the idea of an Asian Bond Initiative, China also has shown great interest in evolving regional capacity to meet the need for financial resources in the long term. It seems China is fully aware of ASEAN’s urgent need to strengthen regional financial facility.

 That is why ASEAN has deliberately taken the initiative to engage China in strengthening regional financial arrangements in East Asia. The above achievements are sound evidence of China’s remarkable achievements in its relationship with ASEAN in the last 15 years.

 In the long term, China’s objective appears to be to encourage ASEAN to be part of East Asia or alternatively to drive East Asia as an integral part of ASEAN. While the first option would be like
the process of East Asian-ization of ASEAN, the second one would be akin to the process of ASEAN-ization of East Asia.

 Actually China is fully aware that it cannot develop without East Asia, neither can East Asia prosper without China. This suggests two things:

 First, China presumes the process of integrating ASEAN, China and East Asia is occurring and unavoidable.

 Second, whether we like it or not, it is not in China’s best interests to hold up the process. If possible, China would even like to speed up the process.

 Accordingly there are three main questions ASEAN needs to answer in its response to the process.
 The first is related to the problem of institutionalizing the process. It makes more sense for ASEAN to choose the ASEAN-ization of East Asia rather than the East Asian-ization of ASEAN. The reasons are obvious.

 The former option provides ASEAN with greater space and opportunity to socialize the importance of the ASEAN way to China.

 However, this option makes it necessary for ASEAN to strengthen its institutional capacity in dealing with the issue of East Asia Community (EAC) building activities. Otherwise the centrality of ASEAN in the entire process of such community building activities will never become a reality.   

 The second problem is related to pace. The question here is how fast does the process need to be carried out? Establishing a time frame might not be the right answer to this question.

 The main reason lies in the fact that ASEAN itself has an ambition to realize the idea of an ASEAN Community. ASEAN, therefore, needs to be much more careful about considering the offers made by China, South Korea, and Japan on the EAC’s establishment. They may give short term benefits but could dilute the realization of an ASEAN community.

 The third problem is related to the dynamic of a strategic environment at international level. ASEAN needs to be aware that its increased and closer interaction with China could cause other countries to be envious.

 It may even send a signal that China is trying to get the status as a hegemonic power in the region. The question then is how can ASEAN and China erase such an impression? In so far as the issue is concerned, ASEAN has tried to manage it by attempting to develop the idea that the identity of East Asia should not be understood geographically.

 This can clearly be seen in the decision to hold the  East Asia Summit in Kuala Lumpur last year, through which Australia, India and New Zealand were invited to join.

 But this may be insufficient to erase the suspicion. In this regard it might be useful for ASEAN to think about holding an ASEAN-U.S. Summit regularly.

 The writer is the Executive Director of Center for East Asia Cooperation Studies (CEACoS), University of Indonesia.

Can Russians be trusted to deliver reliable energy?

Michael Richardson, Singapore

As oil exports start to flow to India and other parts of Asia from a new field near the Russian Pacific coast, can the region count on Russia as a reliable supplier of energy?

 Russia is important because it is the world’s largest exporter of natural gas and the second biggest oil exporter after Saudi Arabia. It also has the potential to become an even bigger supplier to other countries, including those in oil-short Asia.

 The energy outlook for Asia and the Pacific will unfold a bit further when Russian Prime Minister Mikhail Fradhov arrives in Beijing next month on a scheduled visit.

 He will do so amid signs that Moscow is seeking to enhance its power in Asia by offering to meet an increasingly large portion of the region’s rapidly growing demand for energy.

 However, it is China that seems most likely to become the main partner and beneficiary of Russia’s Asia-Pacific strategy. This will cause consternation in Japan just when its new leader, Prime Minister Shinzo Abe, is trying to reassert Japanese influence in the region.

 The United States, too, will be concerned that the energy security of its key Asian ally is being undermined while China is being promised much bigger long-term supplies of Russian oil and gas.

 Europe is also likely to worry that future Russian energy sales in Asia will be at the expense of supplies to the European Union. Japan’s ties with Russia are bedeviled by an unsettled territorial dispute that dates back to the end of World War II.

 By contrast, China and Russia closed a long chapter of Cold War enmity in 2004 when they resolved remaining issues and signed a border treaty. Political, military, trade and investment ties are expanding fast and  Fradkov will be aiming to make them stronger still when he visits Beijing.

 Both Russia and China have said they want to counter-balance the power of the U.S. and its allies.

Russian President Vladimir Putin pointedly told a group of Western journalists and academics last month that relations with China were at their best ever, and that conditions were now in place for keeping them at this level for a long time. He added that Russia plans a massive increase in its energy exports to Asia by selling 30 percent of its oil and gas to the region in 10 – 15 years, compared with 3 percent today.

 Is this an attempt by Moscow to use Asia as a bargaining chip in its dispute with Europe over the terms on which Russia supplies vast quantities of gas to the continent and gains access to its energy industry?

Perhaps in part. But Putin himself noted that economic activity was moving from the Atlantic to the Pacific and that Russia, which has about two thirds of its territory in Asia, wanted to take advantage of this.

 Several recent developments suggest that Russia is serious about strengthening ties with Asia, chiefly with China, and using its abundant energy reserves as leverage to gain greater economic and political influence.

 Last month, two multibillion-dollar oil and gas fields being brought into production by mainly foreign producers off Sakhalin Island in Russia’s far east ran foul of Russian regulators.

 This is widely seen as part of an attempt by Russian state-owned oil, gas and pipeline construction monopolies to take control of energy reserves and distribution networks in Siberia and the Pacific coast in preparation for government directed sales to favored customers in Asia.

 For the ExxonMobil-led Sakhalin-1 project, this happened just as its first oil exports were starting. Japan’s new leader, Abe, has warned that forced contract changes or delays in the second of these projects, known as Sakhalin-2, will have “negative repercussions on the whole of our relations with Russia.”

 Japan’s electricity utilities have signed long-term contracts with this Shell-led project on Sakhalin Island, which is immediately north of Japan, to deliver gas equal to about 10 percent of Japan’s total needs, starting in 2008.

 Mitsui and Mitsubishi, two of the country’s largest trading companies, own 25 percent and 20 percent respectively of the project.

 Meanwhile, China, too, is keen to lock in pipeline supplies of both oil and gas from Russia, which has the world’s biggest natural gas reserves and the eighth largest oil reserves.

 Last year, China imported nearly 13 million tons of crude oil from Russia, or just over 10 percent of total imports. This ratio has been rising steadily since 1999, when imports of Russian oil were negligible.

 Russia is now China’s fourth main source of foreign oil, after Angola, Saudi Arabia and Iran. Sales would be growing even faster if they did not have to rely so much on Russian rail transport, which is expensive.

 Putin indicated that building new oil and gas pipelines to China over the next few years would intensify shipments.

 This sounds like music to Chinese ears. But Russia has a history of failing to deliver on some of its energy promises. Oil sales to China in 2006 are unlikely to be more than 11 million tons, four million tons less than projected. Many of the oil and gas reserves believed to be in Siberia have yet to be proven.

 And Moscow still has not made it absolutely clear whether the pipeline being extended eastwards from Taishet in Siberia will first carry oil into China, or to Japan and other customers via an outlet on the Pacific coast. At this point, however, China appears to be the likely winner.

 The writer, a former Asia Editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.

The spat over the split

Neither the Indonesian government nor ExxonMobil will gain from a protracted spat over the status of the production-sharing contract for the development of the Natuna D-Alpha natural gas block in the East Natuna Sea.
Instead, both parties will lose if this feud escalates into a legal battle or arbitration process, which could drag on for years.
Another bout of dispute between the government and ExxonMobil, only a few months after the resolution of the five-year ExxonMobil-Pertamina quarrel over the Cepu oil block in East Java, would only hurt both sides.
The American oil giant, which claims to have spent US$350 million on exploring the D-Alpha block, would not only lose its investment but could also encounter a stronger wave of  nationalistic sentiment against its operations in Indonesia.
On the other hand, new oil and
gas investors could be scared off by what they might consider to be the heavy-handed manner and capricious attitude the government has toward
its contracts.
One might initially be confused as to how BP Migas — representing the government — and ExxonMobil could have come up with so widely different interpretations of such an important contract involving up to $45 billion in investment commitment.
ExxonMobil owns 76 percent of the gas concession with state oil and gas company Pertamina holding the remaining 24 percent.
BP Migas chairman Kardaya Warnika and Energy and Mineral Resources Minister Purnomo Yusgiantoro confirmed on Oct. 11 the government had terminated the ExxonMobil-Pertamina contract and would later decide whether to retender the concession for fresh bids because the contractor failed to fulfill the requirements for the contract’s extension.
But ExxonMobil immediately denied the government statement, asserting that legally, the firm could continue development preparation until January 2009. The giant oil company claims the contract, which was revised in 1995, is extendible twice, each time for two years, after its maturity in 2005. ExxonMobil’s general manager for Indonesia Peter Coleman even convincingly said on Oct.12 that he had just met with Warnika and the BP Migas chief did not mention anything about contract renegotiations.
But setting this spat against the demand for contract revision Vice President Jusuf Kalla made earlier at his meeting with ExxonMobil senior executives in Washington late last September, one could easily get the impression the government was bent on
having the contract amended because it gives the contractor a 100 percent output split, instead of the 35 to 40 percent other gas concessionaires in the country usually get.
When the contract was revised in 1995 neither the Soeharto administration nor ExxonMobil had anticipated that natural gas prices would skyrocket to record highs, along with oil prices, which rose from $15 in 1995 to about $65/barrel now. Hence, no one at the mineral resources ministry then thought about the need to attach a price-escalation clause to the production split as the government and ExxonMobil did early this year for the production-sharing contract for the Cepu oil block in East Java.
The 100 percent production split for the ExxonMobil-Pertamina contract was then considered fair and necessary to encourage the contractor to invest huge sums in developing the gas field. Unlike other gas blocks, the development of the Natuna D-Alpha field is seen as much more difficult, extremely costly and complex due to the low quality and high carbon-dioxide content of its gas.
ExxonMobil has estimated the Natuna D-Alpha block contains around 46 trillion cubic feet of commercially recoverable gas, but due to the 70 percent carbon dioxide content of its gas the Natuna D-Alpha development could cost between $35-40 billion. The American oil giant claims that even under the current production split, the Indonesian government would earn minimally $13 billion in taxes, net-gas revenues and production bonus for each billion cubic feet of gas sold from the block.
Since both parties have big stakes in the contract, it is clear they are doing their best to resolve their differences.
ExxonMobil, which has big operations and will stay in the country for a long time, would be well-advised to review its 100 percent production split against the current natural gas market conditions. Stubbornly holding to the 1995 contractual terms will only heighten narrow-minded nationalistic sentiment against its presence in the country.
But the government should be reasonable in its demand for the contract’s revision, otherwise it will damage its credibility and earn itself a bad reputation for not honoring the sanctity
of contract.
The government also should draw whatever lessons  it can from this spat by wising up to the importance of  going through contracts with a fine-tooth comb and marking any articles, paragraphs or words that do not fit.