Developing RI gas market<\/p>\n
James Castle and Todd Callahan, CastleGroup, Jakarta<\/p>\n
Aggressive new players from Asia, Australia and the Middle
\nEast are successfully challenging Indonesia's decades-long
\ndomination of Asia's LNG market. In a sign of the times, a
\nJapanese power utility recently announced that it would curtail
\npurchases from Indonesia by 2.3 million tons per year, another
\nutility from Taiwan recently chose Qatar over Indonesia for a
\nUS$8.6 billion LNG contract and the country has lost important
\nbids in China.<\/p>\n
Although such setbacks are extremely disappointing, they may
\nbe a blessing in disguise. Waning LNG exports may finally
\nencourage Indonesia to rethink its domestic energy strategy. The
\nwave of observers now calling on the government to pay greater
\nattention to developing the country's domestic gas market and
\nreduce its dependence on regional LNG buyers are right.<\/p>\n
Indeed, energy analysts have been saying this for years. In a
\nnation with burgeoning energy needs, more of the nearly 3
\ntrillion cubic feet of gas produced each day in Indonesia should
\nbe utilized at home. It is cheaper and cleaner than alternative
\nsources. More LNG and piped gas ought to be sold in Java and
\nother areas of the country that face mounting energy shortages.<\/p>\n
Still, despite extensive reserves, Indonesia's domestic gas
\nsector remains remarkably underdeveloped compared to its
\nneighbors. This is due to the fact that gas has traditionally
\nbeen developed for the lucrative export trade while the domestic
\nmarket, where investment in pipelines and other enabling
\ninfrastructure is minimal, has been largely ignored.<\/p>\n
And, although subsidies are coming down, Indonesia's energy
\neconomy continues to be over-reliant on expensive fuel oil
\nproducts. A switch to gas would produce enormous savings for the
\ncountry. In some cases, diesel is actually cheaper for PLN than
\ngas because the Ministry of Finance pays the difference and it
\ndoes not affect PLN's cash flow. This is a real blow both to
\nenergy efficiency and the countrys finances. It is a pernicious
\ndistortion that must be eliminated.<\/p>\n
In a concrete example of how much can be saved, consider power
\ngeneration. The country is hemorrhaging money by burning diesel
\nand mfo at its plants across Java. At current prices, diesel
\ncosts approximately US$4.50 per unit while gas costs $2.50 to
\n$3.00 per unit. Switching to gas would save the country up to
\n$300 million annually.<\/p>\n
Given the growing appetite for electricity, the shift would
\nyield even higher savings in subsequent years. For this reason,
\nPLN needs more public support to sign gas supply agreements from
\nUjung Pangkah, Oyong, ONWJ, Kepodang and Corridor (see box).
\nBeyond PLN, demand for gas from other customers like Perusahaan
\nGas Negara (PGN), the state fertilizer producers and other large
\nusers is also expanding. Hence it is imperative to bring more gas
\nfields on line to keep pace with demand.<\/p>\n
Despite the clear economic case for gas, several financial
\nobstacles are preventing policy changes that will drive greater
\ngas consumption. One perceived impediment is price. Although
\nIndonesia's most expensive gas is still much cheaper than diesel,
\nbuyers tend to view gas as a commodity in which the price should
\nbe the same in all cases.<\/p>\n
In the Indonesian context, where the sector is still
\nundeveloped, this view is incorrect because gas is not a freely
\ntraded commodity. Both buyer and seller need to make long term
\ncommitments to justify the investment needed to realize the
\nbenefits of gas utilization. Prices differ because every gas
\nfield is unique and has different development costs.<\/p>\n
In negotiations, the buyer's reference point should not be the
\ncheapest gas in Indonesia. It should be the cost of alternative
\nfuels and what constitutes an acceptable price for both buyer and
\nseller for the specific development in question.<\/p>\n
A second obstacle to completing more gas agreements is the
\nvarious guarantees that producers require. Production sharing
\ncontract operators need Standby Letters of Credit (SBLCs), take-
\nor-pay clauses and other contractual assurances before investing
\nin projects that typically deliver returns over 20 year periods.<\/p>\n
In the case of PLN, SBLCs are a particularly serious stumbling
\nblock because of bank lending limits. With PLN's demand for SBLCs
\nin the range of $800 million per year and credit availability to
\nPLN under current lending limits only $550 million, PLN cannot
\nsign appropriate guarantees.<\/p>\n
To overcome this problem, PLN has asked Bank Indonesia not to
\ninclude its SBLCs in the legal lending limit with government
\nlinked banks like BNI and Bank Mandiri. High-level consideration
\nshould be devoted to removing this obstacle so that PLN can
\nrationalize its energy needs.<\/p>\n
There is compelling logic for this request because even though
\nSBLCs do represent exposure, they are not identical to direct
\nloans. The SBLCs do not represent actual drawdowns. They are only
\npotential drawdowns that are unlikely to be used in full.<\/p>\n
The lack of a more robust domestic gas sector has handicapped
\nthe economy and cost the government hundreds of millions of
\ndollars per year.<\/p>\n
After more than five years of economic crisis, Indonesia can
\nno longer afford an energy mix that depends on expensive fuel oil
\nproducts, especially imported ones when there is an alternative
\nlocal fuel available in abundance. PLN and other large industrial
\nusers must gradually break this dependence with the help of Bank
\nIndonesia and the Ministry of Finance. If this can be
\naccomplished, significant government progress will have been made
\nin restoring the economy and placing the country on a sounder
\nfooting.<\/p>\n
James Castle is the founder of CastleAsia, a leading research
\nand business information company based in Jakarta. Todd Callahan
\nis a technical advisor at the same firm.<\/p>",
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