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Indonesia's Tangguh LNG Project

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Syndicated Loan to an Environmentally and Socially Sensitive Development Project

Papua Barat, a province on the Indonesian side of the island of New Guinea, has an abundance of natural gas reserves. With global demand for liquefied natural gas (LNG) increasing, development of these reserves has drawn worldwide attention. At the same time, increased awareness of the risks posed by large-scale development projects made it necessary to consider the impact on Papua Barat's environment and local communities.

Mizuho Corporate Bank (MHCB) is currently financing an LNG development project in Papua Barat together with several international financial institutions. As an Equator adopting bank, MHCB verifies that the project is being conducted with appropriate consideration given to the natural environment and local communities.

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Tangguh LNG Plant

Tangguh LNG Project - Attracting Attention

Tangguh LNG is a major development project involving construction and operation of a plant capable of supplying 7.6 million tons of LNG a year from gas fields in Bintuni Bay in Papua Barat, Indonesia. The gas fields have proven reserves of 14.4 trillion cubic feet.

The project, operated by oil major BP, has drawn substantial attention worldwide against a backdrop of mounting demand for LNG in recent years. Japan, the world's largest importer of LNG, has shown considerable interest in the project with a number of Japanese companies participating as sponsors.

MHCB provided financing for the project in collaboration with international financial institutions including the Japan Bank for International Cooperation (JBIC) and Asian Development Bank (ADB). Two rounds of financing were conducted, in August 2006 and November 2007, with the total amounting to USD 3.5 billion. The plant commenced operations in March 2009, and the first LNG cargo left port for Korea in July 2009.

In financing the project as an Equator Bank, MHCB conducted assessments to determine the project's environmental and social impacts.

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Preserving and Protecting the Natural Environment

As part of the bank's environmental assessment it was confirmed that pollution control conducted at plant site and gas fields is in accordance with local laws and environmental standards established by the International Finance Corporation (IFC).*1 It was also confirmed that appropriate action plans were in place to preserve and protect the local natural environment.

A particular point of emphasis was protecting mangrove forests along the shoreline. Mangroves create an environment that is highly suitable for cultivating shrimp, which is done in nearby coastal waters. So, protection of these mangroves was important not only to protect biodiversity but also to support the local community which relied on shrimp cultivation as a source of income.

BP, the project operator, established a Biodiversity Action Plan to ensure protection of the environment. Scrupulous protection measures are implemented to protect the natural habitats. For example, in laying the pipeline connecting offshore gas fields with the LNG plant on land, cutting-edge construction methods were used to minimize the impact on the surrounding environment. Underground tunnels were dug horizontally in both directions, one from the offshore fields and the other from the plant construction site. The pipe was pushed in from the offshore fields and pulled from the plant construction site. This avoided digging ground in the mangrove forests to lay the pipe, thereby preserving the mangroves.

  1. *1IFC (International Finance Corporation): One of members in the World Bank Group that implements investment and lending to private projects, especially in developing countries.

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Local Mangrove Forest

Initiatives for Local Autonomy

The area around Bintuni Bay is home to a multitude of villages across a wide area populated with ethnic groups with different languages and sets of values. From a social perspective, location of the plant required relocating all the villages (127 households in total). Therefore, a major issue was how to ensure harmony between local communities and to share the benefits of the project.

The assessment found that according to locally held values the benefits reaped by the products from the Bintuni Bay should be shared by all villages in the vicinity of the Bintuni Bay area. Therefore, the operators concluded that it would not only be necessary to compensate villages that had to be relocated to build the planned LNG plant but also support other surrounding villages.

Specifically, an action plan for land acquisition and resident relocation was prepared and generous compensation was provided for building houses and infrastructure. In accordance with the intent of IFC standards calling for relocation compensation, the standard of living of residents has been improved above and beyond prior levels. Moreover, a comprehensive social program was established to support sustained social development. This program aims to provide support in generating employment, by providing technical guidance in various fields such as agriculture and food processing. Additional support is also provided in a number of areas such as health, hygiene and education.

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New House for Relocated Village

Joint Assessments with Financial Institutions with Differing Guidelines

As a member of the banking syndicate financing the project, MHCB continuously monitors implementation of action plans by the project operator. The bank has visited the site for inspections every year from 2007 to 2009, and reviewed semi-annual reports prepared by independent environmental consultants.

Project assessments are conducted in coordination with other financial institutions providing financing. However, since JBIC, a government-affiliated institution, and the ADB, an international development institution, have their own environmental guidelines that differ from the Equator Principles, various adjustments were necessary in order to conduct the assessments.

Lengthy discussions ensured on how to best integrate objectives of the guidelines, which resulted in establishing a progressive and innovative framework to assess and monitor the project. This framework enabled the project to implement action plans for a natural and social environment from a comprehensive and long term perspective.

MHCB intends to draw on this experience going forward providing socially and environmentally conscious financing as an Equator Bank.

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Manager's Comments

As an employee of the managing bank, this job is very challenging for me.

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Aina Kamiyama
Agency Section, Global
Structured Finance
Division
Mizuho Corporate Bank

Since this project encompassed many significant environmental and social impacts, monitoring it for me has been very rewarding. I look forward to continue supporting individual lenders and the banking syndicate through project completion.

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