Indonesia is facing a declining share of global LNG markets, despite its past status as the worlds leading LNG exporter. The decline can be attributed partly to questions over the reliability of Indonesian supply and lower investment in the Indonesian energy sector. Uncertainties over political support for the sanctity of contracts, regulatory transparency, and relatively unfavorable PSC terms have undermined investment support. As a result, Indonesian LNG exports have been partially replaced by exports from Oman, Qatar, Russia, and Australia on world markets. Since early 2005, exports from the export terminal at Arun in Aceh have been cut back below the level of contractual committments, due to continuing production problems in the area, despite the end of the insurgency there. The sector has also faced restructuring under the terms of Indonesias World Bank and IMF lending agreements, with BP Migas taking over the supervisory and management roles formerly filled by Pertamina.

Despite Pertaminas reduced authority, the companys key role in the gas sector was reinforced in June 2004 when BP Migas announced that PT Pertamina has been appointed as the sole sales agent for LNG sales to South Korea and Taiwan. Pertamina will negotiate sales for Total, Unocal, Vico and BP Indonesia. Current contracts with South Korea and Taiwan are due to expire in 2007 and 2009, respectively.

One project that holds tremendous promise for Indonesias future in worldwide LNG markets is BPs Tangguh project in Papua province (also known as Irian Jaya). Tangguh contains over 14 Tcf of natural gas reserves found onshore and offshore the Wiriagar and Berau blocks. The project will involve two trains with a combined capacity of 340 billion cubic feet per year (Bcf/y), expandable to 680 Bcf/y. BPs current plans call for the project to be completed by 2008. Initial planning was stalled when BP lost the bids to supply Guandong Province and Taiwan in early 2003. However, in late 2003 and early 2004, BP secured supply agreements with Fujian, China for 127 Bcf/y, with leading Korean steel producer POSCO for 75 Bcf/y, and with Sempra Energy for 180 Bcf/y over 15 years to begin in 2008. These supply agreements made possible the $2.2 billion investment to develop the fields. Under the new oil and natural gas legislation enacted earlier in 2005, the Indonesian government in March 2005 extended BPs contracts to 35 years for three natural gas production blocks associated with Tangguh.

The 400-mile Natuna pipeline is one of the longest undersea gas pipelines in the world, bringing natural gas from blocks operated by Premier Oil, ConocoPhillips, and Star Energy to customers in Singapore. Singapore is a major consumer of Indonesian gas, which it uses for its growing electricity generation needs. New pipeline proposals that would link East Natuna with the Phillipines are under consideration, but the high financing costs and security concerns in regions to be traversed by the lines make the projects unlikely.

In another possible use for Indonesias natural gas resources, Shell is examining the possibility of building a gas-to-liquids (GTL) plant in Indonesia. The plant, if the project goes forward, would produce 70,000 bbl/d of diesel and other middle distillates using the Fischer-Tropsch GTL process.

Indonesia has 5.9 billion short tons of recoverable coal reserves, of which 58.6% is lignite, 26.6% is sub-bituminous, 14.4% is bituminous, and 0.4% anthracite. Sumatra contains roughly two-thirds of Indonesias total coal reserves, with the balance located in Kalimantan, West Java, and Sulawesi. According to U.S. Embassy reports, Indonesia produced 132 million short tons of coal in 2003, up 16% from 2002. More than three-quarters of the countrys coal production is exported, primarily to Japan and Taiwan, but also South Korea, the Philippines and Hong Kong. With coal exports from China declining over the last two years, Indonesia is now the worlds second-largest coal exporter.
Indonesia plans to double coal production over the next five years, mostly for export to other countries in East Asia and India. The new capacity will come primarily from private mines. The Clough Group of Australia was awarded a $215 million contract for improvements at the Indonesian firm GBPs Kutai mine in East Kalimatan. Another foreign firm with major interests in Indonesian coal mining is Australias Broken Hill Proprietary (BHP).
July, 2003 saw the divestment of Australian mining company Rio Tinto and BP from their joint venture in Kaltim Pima Coal (KPC).The shares were sold to Indonesian firm, PT Bumi Resources for $500 million. According to several reports, the divestment was prolonged and acrimonious as the government objected to Rio Tintos divestment plan, and threatened to mobilize public action to block the mines operations. Ultimately, Rio Tinto and partner BP sold their combined 100% stake for about half of its assessed value.