FOCUS: Govt asked to give upstream incentives if it wants to secure local supply

To deal with the rising local demand for gas, the Indonesian government has decided to secure the local supply of gas by redirecting the gas industry from the current export-oriented business to a locally oriented one.

The local demand has been particularly driven up by the state-owned electricity firm PT Perusahaan Listrik Negara?s (PLN) decision to cut its primary energy costs by converting from expensive oil to cheaper coal and gas, the government?s plan to revitalize the fertilizer industry that has been until now experiencing a shortage of gas supply, and by other local firms? decision to diversify their energy sources from expensive oil to cheaper gas.

?We?ll prioritize our gas production for supplying the local market. We?re working on a presidential regulation that will ban the extension of gas export contracts unless local market has been fully supplied.,? Minister of Energy and Mineral Resources Darwin Zahedy Saleh told the press recently.

He mentioned that in order to secure the local gas supply, his ministry had passed a governmental regulation that requires gas producers to allocate 25 percent of their production to meet the local demand., and a ministerial decree on masterplan of gas transmission and distribution network during 2010-2015.

But analysts have stated that the government has no choice but to honor all the existing long-term gas export contracts and has to wait for several years before being able to secure all of them for the local market. They said that government?s step is also very likely to be hurdled by the problems of infrastructure and local prices, which were always lower than those for exports.

Currently, the gas pipeline is not integrated under one system of network across the archipelago. The country so far has only scattered gas pipelines in northern part of Sumatra , central and southern part of Sumatra , Banten, Jakarta, West Java , East Java , and East Kalimantan .

"Certainly, our land is abundant with gas. But it?s useless if we don?t have the infrastructure to distribute it,? said Zahedi.

He stated that under the gas infrastructure master plan, Indonesia would be developing an integrated network of gas pipeline linking those in Sumatra , Java, Kalimantan , and Sulawesi . Within two years, the country will also have at least three LNG receiving terminals in North Sumatra , Jakarta , and East Java .

Seemingly, the gas infrastructure is less a problem if compared with the gas prices, which vary according to the characteristic of each gas field across the country. Gas prices at local market have been much lower than those in foreign markets.

Under the existing gas sales and purchase contracts, gas prices on the domestic market are now below US$5 per MMBTU. The highest price ever recorded in the country is $7.5 per MMBTU, which was paid by fertilizer firm PT Pupuk Iskandar Muda in Aceh several years ago when it badly needed the gas to continue its operations.

Technical analyst at PricewaterhouseCoopers, William Deertz noted that the problem of local gas supply was mainly the result of the government?s policy of fixing the local prices below market prices. The lower prices have encouraged the gas producers to sell at foreign markets, where they could fetch above $10 per MMBTU.

IPA Executive Advisor Suyitno Patmosukismo said that so far the government?s gas price policy has burdened the investors as the local gas prices were lower while the oil prices were higher despite the fact that the production costs of both were the same.

"The government has previously promised to sell its gas shares from the production sharing contracts at lower prices so that the local consumers can afford them. But it has never happened,? he said.

Chairman of the Indonesian Petroleum Association (IPA) Ron Aston said that gas price should not be used to provide an indirect subsidy to the domestic market as it will deter investment if it is not competitive.

?Competitive gas pricing is required to maintain the domestic gas supplies. It?s better for the government to subsidize the final products, such as electricity, rather than the gas itself,? he added.

But energy analyst Satya Widya Yudha, who is also a member of the House of Representatives? Commission VII which is responsible for mining and energy affairs, said that it is better for the government to provide upstream incentives rather than gas price subsidy.

?Gas prices are highly dependent on how much investors spend on developing their facilities to produce gas. If they?re given incentives at upstream operation, then they can sell at lower prices,? he said.

He noted that the incentive formula could be based on the proportion of production share.

Under standard production sharing contract, the government and gas contractors split gas production at a ratio of 70:30, with the government taking the largest portion.

Satya proposed contractors be given a larger share in their gas output.

?This depends on the characteristic of each gas field because all of them are different.

I think the government should make a study on all of the gas fields so that they can decide the share proportion. That should be done first before implementing all regulations to secure the local gas supply,? he said. (end)

The author is an editor at Petromindo.com. He can be contacted at besalicto@petromindo.com