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.