Without subsidy, gas more attractive

Urip Hudiono, The Jakarta Post/Jakarta

The government should remove existing subsidies on oil-based fuels if it wants to encourage the use of Indonesia's abundant reserves of natural gas, and attract more investment to the sector, an industry player has said.

Total Indonesie Vice President for Planning and Business Development Michael Borrell said the removal of the subsidies was essential as it would make Indonesia's gas sector more competitive than the oil sector. The current lack of competitiveness of the gas industry had made investors reluctant to put their money into the sector.

"It would level the playing field," he said during a panel discussion at the Indonesian Petroleum Association's (IPA) 30th annual convention and exhibition on Thursday, which was the last day of the three-day event, in Jakarta.

"If possible, the subsidies or incentives should in turn be diverted to the gas sector."

To further enhance the country's gas sector's competitiveness, Borrell also suggested that the government refrain from market intervention through the domestic market obligation it imposed on producers, explaining that market-based prices would automatically lead to them fulfilling both local and export demand.

Borrell further said that the government should address the issue promptly in addressing the issues or miss out on fully benefiting from Indonesia's abundant gas resources for the betterment of the country's people and economy. In this regard, Indonesia could learn from Argentina, which successfully managed to reform its own gas sector in 1992.

Indonesia currently produces 7,000 million metric standard cubic feet (mmscf) of natural gas per day.

Referring to a Total study that showed that gas-fired power plants have a net efficiency of up to 57 percent as compared to 39 percent for oil-fired generators, Borrell said that gas-fired power plants also had lower annual operating costs of US$14 per kiloWatt (kW), as compared to $21/kW for oil-fired power plants.

"Gas should be the future of power generation in Indonesia," he said.

Meanwhile, BP Vice President of Finance for Asia Pacific Lilian Fandriana said the government must commit itself to improving the investment climate in the country's oil and gas sector by establishing a consistent legal framework and a competitive fiscal regime, and consistently adhering to these.

"Strong leadership and disciplined efforts are needed to reestablish Indonesia as a leading oil and gas investment country," she said.

The government has initiated $3 billion worth of integrated gas pipeline projects involving the constructing of 2,000 kilometers of gas distribution lines from production points in East Kalimantan, South Sumatra, Riau and East Java to industrial and household consumers in Java and Sumatra. In order to encourage investment, the government has offered an array of both fiscal and non-fiscal incentives.

Among the fiscal incentives are exemption from import duty on the materials and capital goods needed for construction of the pipelines, while the non-fiscal incentives include speeding up construction approvals and the tender process for investors willing to team up with state gas utility PT Perusahaan Gas Negara (PGN), the manager of the projects.