Thu, 02 Oct 2003

Domestic gas should be used to fuel Indonesia's future

Edimon Ginting, Institute for Economics and Social Research School of Economics, University of Indonesia, (LPEM FE-UI), Jakarta

The fact that Indonesia is the world's largest liquefied natural gas (LNG) producer has long been a point of pride. For more than two decades the nation has been the primary supplier of LNG to Japan, Korea, Taiwan and other big markets.

Indeed, Indonesia was one of the first countries to boast LNG facilities and, from its LNG exports, Indonesia reaped huge amounts of foreign exchange to fund the rapid development that characterized the country before the 1997-1998 economic crash.

Today, when the LNG market is becoming viciously competitive, is Indonesia's preoccupation with LNG exports the right policy? The answer is no.

Fact one: Not many know that Indonesia only possesses 3.5 percent of the world's gas reserves.

Fact two: Despite recent gas sales agreements with Singapore and other East Asian countries, Indonesia is fighting an uphill battle vis-a-vis the gas prices that low cost producers in the Middle East and elsewhere can achieve. This is why the country is having a hard time competing with new players with immense gas reserves such as Arab countries, Australia and Russia.

Fact three: Given the disproportionate stress on LNG exports, the domestic gas network has been virtually ignored, leaving the country dependent on more expensive oil as its primary source of energy. The latter is supported by a fuel subsidy policy that mostly benefits the wealthier segments of society.

Although Indonesia is now the world's 17th largest oil producer and has been oil reliant for decades, it can no longer tolerate such waste. Our oil reserves are quickly depleting.

By Southeast Asian standards, the country is still a big producer. But without new discoveries and at the current rate of production, in 12 years Indonesia may become a crude importer.

Therefore, policy makers should gradually shift Indonesia away from its oil dependency to more sustainable energy sources such as gas. It is also logical to channel more gas to energy starved domestic sectors such as power generation, heavy industries and other potential users.

The use of natural gas for domestic purposes is now low as a result of government policies that maintain subsidies, making the price of oil-based fuels more attractive in comparison to gas.

Another constraint is inadequate pipeline infrastructures. Instead of building pipelines from Sumatra to Singapore, the government ought to prioritize building pipeline networks in Java, Sumatra and other industrialized parts of the archipelago.

As a catalyst for change, the nation's leadership must embrace the above facts. Then they must implement the right policies to address these challenges.

Although the 2001 oil and gas law has emphasized gas usage, progress is impossible because the supporting regulations have yet to be issued. Without these supporting regulations, many players are left in limbo because the way forward is not clear.

Also, a perilous gas shortage has emerged in important parts of the country such as East Java. Imagine, officials are lauding gas contracts with Singapore and other export destinations while major industries here face declining supplies.

Ironically, the gas shortage in East Java has not materialized because of a lack of gas -- but because of a failure of policy and leadership. Appropriate supporting regulations need to be in place to encourage more producers to develop gas fields that can supply growing demand.

The incentive for doing this is huge savings to the country. In the power sector, for example, much of the state electricity firm's (PLN) plant output is still reliant on diesel.

In fact, the output of combined cycle plants has been on the decline in the last few years due to problems with domestic gas supply. By the end of 2003, PLN will have consumed the equivalent of 600,000 million metric British thermal units (mmbtu) of gas per day.

For comparison purposes, if the price of a barrel of crude oil is US$20, this means that diesel offers a unit price of $4.50/mmbtu, assuming there are no subsidies. In contrast, the average price of a unit of natural gas for PLN is only about $2.75/mmbtu.

If PLN were to shift to burning gas, this would lop $1,050,000 off the daily fuel bill, savings $383,250,000 per annum. Assuming a foreign exchange rate of Rp 8,500 to the dollar, PLN's savings would be equivalent to Rp 3,250 trillion per year. By 2007 PLN might require some 1 million mmbtu per day. Hence, the economic gains only get larger over time.

In the years ahead gas must become Indonesia's primary source of energy. No longer can the country afford wasteful policies that fail to prioritize national development. No longer should the nation's industries rely so dangerously on depleting oil reserves as their main energy source.

Past political and other constraints have played a part in distracting the country from developing sound and sustainable energy policies. Fortunately, the economic reality is forcing policy makers to take notice and dispense more rational advice.

Hopefully such policies will lead to action that contributes to economic health and the betterment of the country.