The Donggi – Senora LNG Project (DSLNG) is the first LNG alliance in Indonesia to be structured as a downstream project under Law no.22 of 2001. This deal is also significant as the first majority downstream stake acquisition by Mitsubishi. It is owned 45% by Mitsubishi, 29% by Pertaminia, 11% by Medco and 15% by Kogas. The LNG plant will have a production capacity of approximately two million tones of LNG per annum.

 DSLNG will own and operate the LNG plant, slated to start production in the second half of 2014. Exports of

LNG will be delivered to Chubu Electric Power Co, Kyushu Electric Power Co and Kogas. Natural gas for the plant will be supplied from the Senoro gas field and other fields operated by Pertamina.

The Hogan Lovells team was led by Singapore-based energy partner Brad Roach who had also advised Medco Energi on the Donggi-Senoro Project. “I first began advising Medco Energi and Pertamina in relation to the project in 2006 when many doubted that the reserves could be developed. The project is the first downstream LNG project in Indonesia and the different ownership interests in the value chain required careful management,” Roach said.

 In addition to advising Medco in the DSLNG joint venture, Hogan Lovells also advised Medco Energi on a 20% participating interest stake sale in the Senoro-Toili Block Production Sharing Contract (PSC) by Medco Energi to Mitsubishi for US$260m. The transaction completed on 31 Jan 2011. The projected cost of construction is US$600m and will include gas processing facilities, pipelines, condensate handling facilities and harbour works.

Medco Energi retains a 30% working interest and Pertamina holds a 50% working interest in the Senoro-Toili Block (PSC) and other fields operated by Pertamina.

Herbert Smith lead partner David Clinch said the groundbreaking nature of the deal extended as far as the project’s structure: “The DSLNG is one of the first projects to be done where the downstream LNG project is separate from the upstream – under the new oil & gas law. One of the interesting aspects was the particular form of production sharing contract, a 'Joint Operating Body' PSC which is a legacy from the period before the current Indonesian PSC regulatory regime and has some unique aspects revolving around the nature and structure of the body operating the asset and the input this gives all interest holders.”

 According to Clinch, separating the downstream processes from the upstream as independent projects is unusual for Indonesia. “For Mitsubishi, they have taken a majority stake in a downstream project (DSLNG), which is historic because its never been done. They’ve normally taken minority stakes and not been the leading player operationally in the downstream. Medco is the leading player operationally and will continue to be, together with Pertamina, the state entity. But in the downstream, the LNG project is a milestone transaction for Mitsubishi,” he said.

 In addition to this project, the downstream Donggi Senoro LNG Project (upon which Herbert Smith and HBT also advised Mitsubishi), the Masela project and developments and renewed focus on East Natuna suggest a renewed resolve on the part of the Indonesian Government to move ahead with a number of major gas projects that have been talked about for quite some time.

 This deal is also an example of substantial continuing Japanese investment and interest in the Indonesian natural resources sector. Between 1990 and 2009, Japan has registered as the largest foreign investor in Indonesia, with US$21.5bn invested, according to statistics released by Indonesia’s Investment Coordinating Board.ALB

Other related stories:

• Indonesian competition watchdog sends a clear signal to petroleum industry (22 Feb 2011)
• Indonesia: Melli Darsa, Jones Day  team up for bumper Buma issue (23 Feb 2011)
• Norton Rose hires new energy head to lead charge into Indo market (17 Dec 2010)