T

he government will most likely resort to using a formula to allow gas prices at the downstream level to fluctuate depending on the upstream prices.

The formula would be implemented for 10 select industrial sectors and one industrial zone and would annul the previous plan in which the government sought to slash prices to below US$6 per million British thermal units (mmbtu).

I Gusti Putu Suryawirawan, the Industry Ministry’s metal, machinery, transportation equipment and electronic industries director general, said on Thursday that the new formula would be based on the upstream gas prices, the average volume of gas used by a sector and the value of the final products.

“The expected outcome is not fixed gas prices because the prices will rise along with the sectors’ value,” Putu told reporters after attending a meeting at the Coordinating Economic Ministry. At present, gas prices in Indonesia are among the highest in Southeast Asia at $8 to $16 per mmbtu, whereas they hover between $3.50 and $7.50 per mmbtu in neighboring countries, according to data from the Industry Ministry.

At least three industrial sectors — fertilizer, steel and petrochemical — have obtained certainty that they will enjoy the new gas prices. Gas consumption accounts for up to 70 percent of their total production costs.

Progress for the remaining seven sectors — pulp and paper, ceramics, glass, food and beverages, tires and latex, oleochemicals, and textiles and footwear — is ongoing and gas-related costs amount to between 7 percent and 32 percent of their total production costs.

The average selling price at the upstream level is $5.90 per mmbtu at the moment. That price consists of several components, namely capital and operational expenditures, the contractor’s share and the non-tax and tax revenues to be submitted to the state.

Lowering the upstream gas prices to $3.82 per mmbtu is possible if the government is willing to remove both the non-tax and tax revenue components, but at the cost of losing $1.2 billion in revenues per year.

However, the Industry Ministry estimates that the economic benefits of lower gas prices can amount to Rp 32 trillion (US$2.39 billion) if the prices were cut to $4 per mmbtu, with additional distribution and transmission costs of $1.50 to $2.

Energy and Mineral Resources Minister Ignasius Jonan remains tight-lipped about the scale of the price reduction, but said the end-user price would still be as expected. “The maximum price will be $6 per mmbtu,” he said.

Meanwhile, Forum for Natural Gas-Using Industries (FIGB) head Achmad Safiun said that it was high time the government slashed the prices as they were substantially higher than those in the global market.

He claimed the high prices were caused by inefficiencies in both the upstream and downstream gas sector. “In the end, it affects our investment atmosphere and weakens our competitiveness,” Achmad said.

The high prices have forced many factories in North Sumatra and East Java to close down and as many as 20,000 workers have been laid off since 2000, data from the Association of Gas-Consuming Companies (Apigas) shows.