Introduction

The Arun natural gas project in Northern Sumatra is probably the most lucrative LNG operation in the twentieth century. This chapter analyzes the issues involved in the transmission of that gas to potential buyers and why Japan became Arun's only foreign market in its first two decades. Following a description of the development of the Arun field and its LNG facilities, we review the agreements made with the initial buyers. To explain the context in which these contracts evolved, we analyze Pertamina, the Indonesian national oil company, and the political and economic conditions in the Republic at the time. We give considerable attention to the long-term impact of this trade on the Japanese and Northeast Asian gas markets, the contractual relations between Pertamina and Japanese buyers, and competition among those buyers.

The basic thrust of this analysis is that Japan was the only viable customer for Arun's gas in the initial decade after discovery. Japan had a need for clean energy, was prepared to use LNG, and was willing to finance the project in Indonesia. There was not a sufficient domestic market in Indonesia at the time and Arun was perceived to be geographically too far from its population center. The rest of East and South Asia had not developed to the point of usefully importing LNG and did not have the ability to finance these operations. Singapore was later to become an importer of gas piped from Indonesia, but at the time was not interested in Arun.