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Doubts mount over gas price cut for industry
President Joko “Jokowi” Widodo’s call to cut industrial gas prices has become a ball and chain for local gas producers and distributors, who have long been perplexed by the same old problems such as a lack of infrastructure and a lengthy supply chain
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resident Joko “Jokowi” Widodo’s call to cut industrial gas prices has become a ball and chain for local gas producers and distributors, who have long been perplexed by the same old problems such as a lack of infrastructure and a lengthy supply chain.
Jokowi has instructed his Cabinet to cut end-user gas prices to below US$6 per million British thermal units (mmbtu) for seven industrial sectors in a bid to strengthen the downstream sector and create a significant multiplier effect in the economy.
Industry Minister Airlangga Hartarto has stated the economic benefit of lowered gas prices could reach Rp 32 trillion ($2.46 billion) if prices were cut to $4 per mmbtu, with an additional distribution and transmission cost of $1.5 to $2.
To meet the target, the government has issued a regulation stating that the Energy and Mineral Resources Ministry can lower prices by a maximum of $2 per 1 mmbtu if gas prices are higher than $6 per mmbtu.
However, the lower price policy has only been imposed to the petrochemical, fertilizer and steel industries since Jan. 1, while gas prices for four other industries — oleochemical, glass, ceramics and rubber gloves — were still in limbo.
Sampe L. Purba, the gas commercialization division head at the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), said there were loopholes that needed to be closed if the government wanted to fully implement such a policy.
“For example, the gas price might stand at $8 per mmbtu in the upstream sector and reach more than $10 among traders or shippers in the midstream sector. The question is, when the government forces upstream players to lower the price by $2, how much will be cut from midstream players? Will it only be implemented in the upstream [sector]?” Sampe said recently.
Sampe cited a case in which the gas price stood at only $5 per mmbtu in the upstream sector but reached more than $10 in the midstream sector. “As the minister can only lower the price in the upstream sector if it is higher than $6 per mmbtu, will there be another adjustment for midstream players?” he said.
He said such problems must be addressed because the presence of traders and shippers as midstream players was crucial in the gas industry, especially considering that many gas producers did not have proper facilities to transport their gas nationwide.
Indonesia’s gas production reached around 7,883 billion British thermal units per day (bbtud) throughout 2016, while demand for the country’s industrial sector amounted to 2,750 bbtud. Of the total demand, as much as 1,600 bbtud of gas was allocated to various industries and only 482 bbtud was distributed directly to end users. The remaining 1,118 bbtud was taken over by numerous traders including state-owned gas distributors Perusahaan Gas Negara (PGN) and Pertagas Niaga.
According to SKKMigas, the average price of gas within the first nine months of 2016 in the upstream sector — taking into account capital expenditure, operating costs, contractor shares and the government’s tax and non-tax revenue — only amounted to $5.9 per mmbtu, while the distribution and transmission costs stood at a total of $2.39 per mmbtu.
At the same time, the weighted average price of LNG in the upstream sector was at $4.36 per mmbtu, while extra costs, including for shipping, regasification and transmission, reached about $4 to $6 per mmbtu.
Based on simulations at some gas blocks, state-owned oil and gas giant Pertamina claimed to have made almost all upstream gas prices stay at $6 per mmbtu from an average of $6.28 and $8.22 per mmbtu. However, the figure jumped again for the end users.
“We’ve tried to comply with the policy, but we also need incentives that can help us economically as we still have to develop infrastructure in marginal gas fields, like ones in Aceh,” Pertamina spokesperson Wianda Pusponegoro said.
Winda said Pertamina had also slashed its profit margin by $1.09 per million standard cubic feet per day (mmscfd) of gas in transmission and regasification fees at its Arun LNG facility in Aceh, but the end-user gas price in the northern part of Sumatra still stood at $12.45 per mmbtu.
Gas demand in Sumatra, the western part of Indonesia, is currently supplied from the country’s eastern regions, namely from Donggi Senoro field in Central Sulawesi and Tangguh field in Papua, leading to costly distribution.
Therefore, Sampe said even an imported gas would not help lower gas prices as the real problem was the country’s lack of infrastructure. “Such imports won’t necessarily lower end-user prices as the gas needs to go through several other phases after it arrives in the country, including shipment, regasification and transmission,” he said.
According to SKKMigas, Indonesia will need to spend at least $24.3 billion until 2030 to develop proper gas infrastructure across the archipelago.
