Indonesia needs to expand local share of gas reserves

Indonesia needs to expand local share of gas reserves

By Berni K. Moestafa

JAKARTA (JP): Indonesia is the first country to export
liquefied natural gas (LNG) and is currently the biggest LNG
exporter, making up 30 percent of the world's LNG trade.

According to data issued by state oil and gas company
Pertamina, Indonesia exported 26.35 million tons of LNG in 1988,
followed by Algeria with 18.2 million tons and Malaysia with 14.2
million tons.

With proven natural gas reserves of over 130 trillion cubic
feet (tcf), Indonesia will likely maintain its presence as a
major player in the world's LNG trade.

Chairman of the Indonesian Petroleum Association William T.
Fanagan said that during 1994 to 1999 alone, Indonesia discovered
hydrocarbon reserves equivalent to 5 billion barrels of oil, 80
percent of which was natural gas.

Despite the vast reserves and the recent discoveries, many of
them remain undeveloped because the reserves had no markets,
Fanagan said.

He was referring to the undeveloped small gas reserves
scattered across the country. The few larger reserves, such as
the Natuna gas fields located in the Southeast China sea, are
being developed for the export market.

They include the Arun gas fields in Aceh, the Bontang fields
in East Kalimantan and the Tangguh field in Irian Jaya.

Most gas discoveries, however, contained reserves that were
too small to provide the basis for a stand-alone LNG operation
for export markets.

But while Indonesia leads the world's gas market with almost
60 percent of its gas production in 1999 shipped out in the form
of LNG, domestic consumption accounted for only 20 percent.

"We need a workable domestic gas policy that promotes the
widespread use of gas and invests in expanded gas
infrastructure," Fanagan said.

He said a workable gas policy would reduce the use of
subsidized fuels and expand the exploration and development of
new fields.

Energy policy

Pertamina's exploration and production director, Gatot K.
Wiroyudo, said the government's new energy policy gave more
attention to the use of gas as an alternative fuel.

To encourage the development of gas fields, the government was
offering incentives to Pertamina's gas production sharing
partners, Gatot said.

He said these incentives aimed at making upstream gas
development projects more feasible.

He said that under gas production sharing contracts, investors
would receive 30 percent and Pertamina 70 percent from the gas
revenue.

This doubles the share from an oil production sharing
contract, which splits revenue by 15 percent to 85 percent for
Pertamina.

"Investors in remote area can even get a 40 percent share, and
other incentives can be offered on individual bases," Gatot
explained.

However, he agreed that a domestic gas policy must confront
the problem that subsidized fuel was causing.

"What is hampering the growth of local gas demand is the
presence of subsidized fuel," Gatot explained. He said that gas
prices could not compete against the low prices of the subsidized
fuel.

According to Gatot, in order to boost the gas market, the
government must either abolish the fuel subsidy or subsidize gas
for local consumers.

The government is planning to cut the fuel subsidy by an
average 12 percent in October, after having delayed the move in
April due to mounting public opposition.

Gatot added that cheap gas sold to some industries was also
discouraging to investors.

He said the government offered low gas prices to the
fertilizer industry, which was the largest domestic gas consumer.

Last year, the fertilizer industry accounted for 35 percent of
total domestic gas consumption.

He said that in order to make fertilizer affordable to local
farmers, the government demanded that Pertamina sell gas at a low
price.

Gatot added that at present the domestic market was unable to
purchase the gas at a feasible price.

"However, the cheap price of gas does not encourage investors
from developing gas fields," he further said.

But Gatot warned that applying a standard gas price might also
harm investors, as they faced different levels of costs depending
on the locations of the gas discoveries.

"The closer the gas discoveries are to the presence of
infrastructure, the cheaper investors can sell their gas," he
said.

President of state gas distribution company PT PGN Qoyum
Tjandranegara has another view on why the development of many gas
discoveries is slow.

He said an inadequate gas pipeline network was hampering the
distribution of gas to its main market in Java, hence making the
development of many reserves unfeasible.

"The presence of a gas transmission line will dictate the
marketability of the gas," Qoyum said.

While the central market for gas was located in Java, he said,
most gas reserves were scattered in Sumatra, Kalimantan, Sulawesi
and Irian Jaya.

Less then 10 percent of the country's total proven natural gas
reserve is located in Java, data from PGN reveal.

"The problem is how to transport the gas from the sources to
the central market area. It needs a gas pipeline infrastructure,"
Qoyum said.

He said that linking scattered gas reserves with the market
would, among other things, absorb small and marginal fields
nearby, create new gas markets close to passing pipelines and
reduce the transportation costs of gas.

The presence of such infrastructure would also make the
development of smaller gas reserves more attractive to investors,
he added.

Qoyum suggested that government develop a comprehensive gas
pipeline network, instead of the previous "piecemeal
developments".

He proposed the Indonesian Gas Transmission System (IGT) link
East Kalimantan, Java, Sumatra, Batam, Singapore, Johor
(Malaysia), Brunei and the Natuna reserves with the market.

"There is likely large potential for additional gas markets in
Indonesia, and it will surely materialize with the introduction
of advanced gas utilization systems and gas supply
infrastructure," he said.

However, as domestic markets remain undeveloped, Indonesia
will continue to expand its LNG exports.

Pertamina last week signed an memorandum of understanding
(MOU) with India to supply the country with LNG; most likely from
the Bontang gas fields.

Although both countries still need to discuss a final
agreement, But Pertamina is upbeat that India will name it as its
gas supplier.

Pertamina has also expressed optimism that it would win an
upcoming tender next month to supply China with three million
tons of LNG gas annually.

The LNG will come from the Tangguh gas fields, which Pertamina
jointly develops with oil and gas company BP Amoco Indonesia.