Natural gas policy revisited
Hanan Nugroho, Jakarta | Wed, 05/12/2010 9:04 AM | Opinion
For four decades Indonesia has implemented the “explorer’s view” in developing its natural gas industry.
“Sell the gas to the off-taker offering the highest price at well head”.
Using this approach — one we have been practicing since the early period of the natural gas industry development in Indonesia — our gas reserves have gone to foreign countries which were able to pay higher prices than domestic buyers may afford.
The natural gas industry might produce higher economic value through value added creation, jobs and domestic taxes if it was developed integrally along its value chain, from upstream to downstream in a single domestic market.
Studies showed that values of developing natural gas in Indonesia (as fuel for electricity and feedstock for petrochemicals, etc.) would be larger than the current practices of exporting them to foreign markets.
There are several methods to transport natural gas. The largest application is by flowing the “dry gas” through pipelines or transporting them using the LNG (liquefied natural gas) technology chain.
Regarding the LNG method, natural gas is liquefied (making its volume much smaller) and is therefore easier to transport across the ocean using an LNG ship. At the destination port (receiving terminal) LNG is re-gasified then transported using high pressure pipelines to major consumers, mainly power plants.
For nearly three decades Indonesia was the world’s largest exporter of LNG (with Badak 22.6 MTPA and Arun 12.5 MTPA). The huge volume of LNG (comparable to 3-5 times of natural gas consumed in Java) is exported to Japan , South Korea and Taiwan . Qatar took over the position in 2006.
Badak is the first LNG plant built in Indonesia and exported its first cargo in 1977. Arun followed the next year. In terms of speed in developing the LNG industry (from gas field discovery to the first cargo delivered), both are among the fastest in the world.
The exports from Badak and Arun had made East Asian the world’s largest LNG trade region.
In addition to exports LNG, we send huge volume of natural gas by pipeline from South Sumatra and Riau Archipelago to Singapore (675 mmcfd) and Malaysia (250 mmcfd).
When Badak and Arun started exporting, our demand for energy was very low; cheap oil (and massive use of traditional biomass) was sufficient to fulfill our energy requirements. Technology for using natural gas — in the combined cycle power plant for instance — was still developed; many of us did not know the prospect of natural as the queen of fuels.
In the 1970s, Indonesia started the first Five Year Development Plan. Since then, not only the country’s manufacturing industry has grown fast, demand for energy has increased, electricity in particular.
To meet the increasing demand, natural gas promised to be the best option as this energy is cheaper, cleaner, more efficient than oil, and the reserves are much larger than that of oil.
When giant gas-fueled power plants were built in Java in the 1990s (Muara Karang, Muara Tawar, Tanjung Priok, Gresik, Tambak Lorok) there was growing concern that the country must secure gas supply for the very expensive plants, which was relying on offshore sources close to Java.
In addition to gas dedicated to those huge plants, the introduction to natural gas in Java through the development of gas transmission and distribution facilities during the 1980-90s has increased potential demand for natural gas considerably. Unfortunately, Java’s indigenous gas reserve is limited. The dense island is already a natural gas deficit one.
The signing of the LNG sales contract from Tangguh to China in 2002 — where the gas was sold cheaply at US$3.3 per mmbtu — hurt contract parties of the previous sales for Indonesian LNG.
The domestic power and manufacturing industry was also wondering why the government decided to prioritize “other country first” rather than to meet their thirsty for gas.
Gas allocation (supply to domestic market or to export the gas) has become a hot issue in Indonesian natural gas policy. Donggi-Senoro is a recent case showing increasing tension of the issue.
DS-LNG consortium (Mitsubishi, Pertamina and Medco) signed a Head of Agreement with Chubu and Kansai Electric Power Cos. in February 2009, wherein each company set to be delivered with 1 MTPA of LNG for 15 years, starting from 2012.
However, the agreements and the overall LNG plant project’s continuity had been rocked by then vice president Jusuf Kalla’s remark last year that natural gas from Senoro and Matindok fields (planned to supply the plant) must be sold to domestic users.
So far, the new government has not decided on the Donggi-Senoro gas allocation.
Some points are underlined here. Giving priority to domestic market is a sound policy that — in longer terms — promises better and more economic benefits for our country (including revenue for the government), also lowering the risk associated with future energy shortage.
But this approach — to be fully materialized — requires long term commitment and large efforts.
First, we have to accelerate the development of domestic natural gas infrastructure (transmission, distribution and an LNG receiving terminal, etc.).
Different to oil and coal, the use of natural gas requires that specific infrastructure is prepared in a timely manner before the gas can be flowed. Our demand centers for gas are in Java, meaning that infrastructure to transport gas to and within Java must be developed in tandem with the decision to flow the gas.
Merely a political euphoria to allocate our gas to domestic markets does not guarantee that the gas will flow to desired destinations. Other derivation policies and action plans are needed to ensure that the strategic policy works.
Despite our wealth of natural gas reserves, fast growing demand and relatively low cost for constructing natural gas infrastructure (compared to government energy subsidy paid each year), infrastructure to serve our domestic market remains far underdeveloped.
Second, export buyers are always able to pay at higher prices, providing clear and more stable revenue to the government. However, this does not always mean that — in the longer term —the economic benefits of exploiting our natural gas are larger if it is exported than it was used to serve the domestic market.
To bridge domestic buyers’ affordability, the government may temporarily provide subsidy for using natural gas. For equivalent energy produced, giving subsidy to the use of natural gas will need lesser amount of funds than that to oil.
On the other side, surely, we will no longer afford to pay the increasing costs for oil imports (which currently has reached one third of Indonesia ’s import values).
Summing up, it will be more beneficial if we start shifting our energy economic policy from “export gas/LNG, import oil” progressively to “use more gas domestically, reduce oil imports”.
To bridge domestic buyers’ affordability, the government may temporarily provide subsidy for using natural gas.
The writer is senior energy planner and an economist with the National Development Planning Agency. The opinions expressed are his own.
