The Indonesian Petroleum Association (IPA) has asked the government not to regulate the price of gas sold to local buyers under the Domestic Market Obligation (DMO).
"Gas pricing should not be used to provide an indirect subsidy to the domestic power market as this will deter investment if it is not competitive. Regionally competitive gas pricing is required to attract investment for exploration and development of natural gas supplies," IPA's president Ron Aston told lawmakers from Commission VII overseeing energy and mineral resources during a hearing on Tuesday.
Indonesia's law on oil and gas requires oil and gas producers to allocate 25 percent of their production to the domestic market.
Suyitno Patmosukismo, an executive advisor at IPA, said that currently the price had not been regulated by the government. "The price is determined under business-to-business arrangements. Thus, the price may vary from one project to another, but in general the domestic gas price is lower than the market price," he said.
Suyitno added that the IPA which groups 49 oil and gas producers operating in Indonesia, raised the issue of gas pricing in the meeting because there was a demand to ask the government to regulate the price.
Domestic gas demand is increasing as state electricity utility PLN is switching its oil-fired power plants to gas fired-power plants to reduce the government's spending on subsidized fuels. In 2009, oil-based fuel consumption contributed 25 percent to PLN's total energy production and consumption. By increasing coal and gas consumption, the company expects to reduce the percentage allocated to fuel oil to 19 percent this year and 12 percent in 2011.
During the hearing, IPA also raised concerns on the issue of cost recovery. Indonesia's oil and gas production-sharing contracts (PSC) allow contractors to be reimbursed for expenses incurred in the exploration stage of a project, within the scope of the cost recovery payment rules. Following strong criticism over alleged lack of transparency in the implementation of cost recovery, as of last year, eligible expenses due for payment from the state budget have been capped annually.
IPA demanded that Indonesia not continue to include the cost recovery payment in the state budget and not to cap the payment. "Otherwise this would represent a threat to agreed contract terms and result in legal conflicts," Aston said.
He added that in the long term the regulation would also undermine investors' motivation to invest in Indonesia's hydrocarbon industry.
The Energy and Mineral Resources Ministry revealed recently that oil and gas investment had declined from US$13.52 billion in 2008 to $12.18 billion in 2009.
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