U.S. Energy Developers Strategize Amid Asia’s Woes, Oil’s Price Dive

U.S. companies poised to exploit Asia’s once-unquenchable appetite for power have been halted in their tracks by the region’s economic crisis and the collapse of world oil prices, a double whammy that has imperiled at least 19 big power projects and billions of dollars’ worth of long-term energy contracts.

Asia’s financial collapse hit the energy sector particularly hard because it occurred during a period of massive government investment into energy infrastructure projects across the region.

At the same time, Indonesia--the biggest of the hard-hit economies--has also been blindsided by the oil price collapse, which has slashed the value of its biggest export by about 40%.

U.S. energy firms, long accustomed to operating in parts of the world where political and economic instability are part of daily life, are hardly beating a retreat. But it has them scrambling to protect their already enormous investments in Asia and huddling with their insurance agents--including the U.S. Overseas Private Investment Corp.

“There were too many dollars trying to chase riskier and riskier projects with lower and lower returns,” said Mark Lauby, executive director of Asia for the San Francisco-based Electric Power Research Institute.

With billions of dollars invested in power plants and pipelines, most companies are devising strategies to survive the turmoil and ensure they are in the running when Asia’s battered economies get back on their collective feet.

“We have projects underway in Indonesia, Thailand and the Philippines, and we intend to move forward in each of those countries,” said Edward Muller, president of Edison Mission Energy, an Irvine-based power developer active in Asia. “Many of our competitors have been fair-weather friends.”

Mission Energy’s most ambitious Southeast Asia project, a $2.5-billion Paiton power plant in East Java, is still on track for completion in mid-1999. In January, however, Standard & Poor’s slashed its ratings on bonds and bank loans issued to Paiton and three other large Indonesian projects, citing concerns that the state electricity company, P.T. Perusahaan Listrik Negara, could not honor its long-term electrical contracts.

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Indonesia has had the worst fallout, with its cash-strapped government reeling from a 70% currency devaluation, diminished energy demand caused by slowing growth and the oil price plunge.

Indonesia, a member of the Organization of Petroleum Exporting Countries, is a relatively small player--producing about 1.39 million barrels daily last year--but exports about a third of its output, mostly to Japan. Oil represented about 14.5% of Indonesia’s $49.8 billion in exports in 1996, according to the International Monetary Fund.

“This couldn’t have come at a worse time for Indonesia,” said Stephen Parker, chief economist at the Asia Foundation’s San Francisco office. “First it was the drought, then the haze, then the financial crisis and now oil prices going down.”

So far, Omaha-based CalEnergy Co. has suffered the biggest losses, having invested $500 million in three 400-megawatt power projects in Indonesia that were among 19 projects placed on hold last November after the rupiah went into a free fall, pushing the nation to the brink of insolvency.

The publicly held company took a one-time charge of $87 million in the fourth quarter of last year. That represents what the company estimates it would lose if the Indonesian government canceled all its projects, which is the “worst-case scenario,” according to Craig Allen, CalEnergy’s manager of investor relations.

Also on Indonesia’s list was a proposed $507-million electrical power project being developed by a coalition led by Houston-based Enron International. The group was in the process of obtaining financing for the East Java power plant.

“We were very fortunate that we hadn’t financially closed and that the project was not under construction,” said Joe Sutton, president and chief operating officer of Enron International, which also operates two power plants in the Philippines.

The economic crisis has significantly slowed energy demand in Asia, increasing the likelihood of more project delays or cancellations in the future. A top Indonesian government official said recently that his country would have at least 5,000 megawatts of surplus electrical power in 1999 because of the fall in domestic consumption.

U.S. companies with long-term contracts to sell oil, gas or electricity--such as Arco Indonesia, a unit of Los Angeles-based Atlantic Richfield Co., and El Paso Energy Corp.--are also having trouble getting paid because the currency turmoil has dramatically increased the amount of local currency needed to cover their customers’ dollar contracts.

Arco Indonesia, the largest supplier of natural gas to the island of Java, has called in letters of credit from Indonesian banks that had guaranteed its payments from Pertamina, the Indonesian state oil and gas company.

Al Greenstein, an Arco spokesman, said Arco has been fully compensated for the gas it has provided Pertamina to date. He said Arco is holding talks with the company to devise a plan that would allow it to maintain its long-term contract. He would not elaborate on the specifics of a contract restructuring.

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Arco has a huge stake in keeping its relationship with Pertamina intact, since the California energy firm recently discovered the world’s third-largest natural gas field--boasting reserves of an estimated 13 trillion cubic feet--off the island of Irian Jaya.

“Indonesia does play a large role in our future, and we are determined to work through the current problems,” Greenstein said.

An official at El Segundo-based Unocal Corp., which operates or supplies steam to six power plants in Indonesia, said Pertamina is current on its payments and has not made any requests to renegotiate its contract. The Indonesian government has, however, placed one Unocal power project in Sumatra on hold.

“As in all the situations in Asia, we’re cautious about everything,” said Unocal spokesman Barry Lane. “At this time, they’re current [on their payments]. We’re just watching the whole situation there.”

Lane said Unocal--which has made Southeast Asia the centerpiece of its development strategy--has been protected from the currency fluctuations in Asia because its contracts all require payment in dollars or in oil and gas, which can be sold on the world market.

In Thailand, Unocal suffered a minor setback earlier this year when newly elected Prime Minister Chuan Leekpai agreed to reevaluate a controversial pipeline project involving Unocal, French energy giant Total, and the state energy companies of Thailand and neighboring Myanmar.

The $1.2-billion Yadana pipeline--which will bring gas from the Andaman Sea through Myanmar (formerly Burma) to Thailand--has attracted great controversy.

Human rights activists accused the military regime in Myanmar of using forced labor during the pipeline construction and environmentalists decried the project’s impact on wildlife and nearby forests.

But after reviewing the project, the new Thai government decided last month that the pipeline should be completed because of its importance to the economy but that the government should take extra precautions to reduce any environmental harm.

Savit Bhobiwihok, Thailand’s minister in charge of energy policy, said the Yadana project would bolster Thailand’s domestic energy capabilities and bring in additional revenues from export sales.

“This gas pipeline will allow us to be less dependent on imported oil,” he said during a recent visit to Los Angeles with the prime minister.

That’s good news for Unocal, which has invested $5 billion in Thailand alone over the last three decades. Lane, of Unocal, said the Thais and officials of other cash-strapped Asian governments are interested in boosting production of oil and natural gas to replace more expensive imported oil.

“We see that fuel-switching is going to increase the market,” he said.

Mission Energy, a subsidiary of Edison International of Rosemead, parent of Southern California Edison, is benefiting from U.S. efforts to reward the new Thai government for pushing forward with tough economic reforms, including the closure of bankrupt financial institutions and removal of barriers to foreign investment.

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Last month, the U.S. Overseas Private Investment Corp. agreed to provide $400 million in political risk insurance and financing for two Mission Energy power projects in Thailand. Texaco Inc. is a partner in one of the projects.

OPIC, a federal agency, provides investment services to U.S. companies doing business in developing countries where the operating risks make it difficult to obtain financing. The agency’s major line of business is insurance that protects companies against damages or loss of assets caused by political or economic instability.

“OPIC’s support of private American investment in Thailand is key to American foreign policy goals of promoting continued economic reforms in the country,” said George Munoz, OPIC president and chief executive.

So far, there have been no claims filed by companies holding OPIC insurance on projects in Asia, which represents 20% of the agency’s $9-billion portfolio, according to OPIC spokeswoman Marcela Sandoval.

CalEnergy, which holds OPIC and private insurance on its three projects in Indonesia, is confident it could collect about $210 million of the funds it has invested to date, according to Craig Hammett, CalEnergy’s chief financial officer.

But Hammett said CalEnergy has not filed a claim with OPIC because it remains hopeful the Indonesian government will eventually allow the company to move forward since the projects are fully financed and two of the three are well underway.

In spite of CalEnergy’s huge headaches in Indonesia, the company remains committed to expanding its business in Asia, according to Hammett. CalEnergy also has three power plants in the Philippines and a project in western Australia that have not been hurt by the Asia slowdown.

“In the short term we would be more cautious about additional investment in certain areas in Asia,” he said, “but we still believe over the long term it is an area that warrants additional investment.”

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Powering Down

Electricity demand in Southeast Asia soared along with economic growth in the 1990s. But the region’s economic crisis has significantly slowed energy demand, causing numerous project delays for U.S. power developers. Electricity consumption in Southeast Asia, in billions of kilowatt-hours*:

1996: 233.02

*A kilowatt-hour would power a color TV for five hours.

Note: Figures are for Indonesia, Malaysia, the Philippines, Singapore and Thailand.

Source: U.S. Energy Department’s Energy Information Administration

Researched by JENNIFER OLDHAM / Los Angeles Times