The government’s mission to lower industrial gas prices has been considered economically unfeasible, especially for liquefied natural gas (LNG), which sees its price depending on global crude oil prices with lack of certainties in domestic demand.

President Joko “Jokowi” Widodo 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.

However, the lower price policy has only been imposed on the petrochemical, fertilizer and steel industries since Jan. 1, while gas prices for the other four industries — oleochemical, glass, ceramics and rubber gloves — are still in limbo.

Sampe L. Purba, the gas commercialization division head at the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), said the price mechanism for LNG in Indonesia was based on a long-term contract that took global crude oil prices into account.

He explained that a contractor used to take about 10 to 14 percent of the global crude oil price to decide the gas price, depending on each contract’s commercial terms and the market balance by the time the negotiation took place, to measure the LNG price.

“Hence, when the crude oil price stands at approximately $50 per barrel, like today, the LNG price may be about $5 per mmbtu, which is fine. But what will happen if the price touches $100 per barrel?” Sampe said recently.

Following the Organization of Petroleum Exporting Countries’ (OPEC) decision to cut output by 1.2 million barrels of oil per day (bopd) in 2017, energy think tank Wood Mackenzie has predicted that the annual crude price average will stand between $53 to $58 per barrel.

It may further increase to $60 to $65 per barrel by May if non-OPEC members meet their commitment to trim output by 558,000 bopd.

Moreover, Sampe said that 80 to 90 percent of domestic LNG production was allocated to the electricity sector. Therefore, he said it was important for state-owned electricity firm Perusahaan Listrik Negara (PLN) to ensure the growth of LNG demand in its electricity procurement business plan (RUPTL).

“In general, PLN has yet to use gas as the main energy source for electricity generation. Gas has just been used for peaker plants that run only when the demand is at peak,” Sampe said.

PLN has forecast that it will need about 2,000 billion British thermal units per day (bbtud) of natural gas supply by 2019, twice as much as today.

Meanwhile, Sampe said 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 by themselves.

Indonesia’s gas production reached about 7,883 bbtud throughout 2016, while demand for the country’s industrial sector amounted to 2,750 bbtud.

According to SKKMigas, the weighted average price of LNG in the upstream sector was at $4.36 per mmbtu, while other costs, including shipping, regasification and transmission, reached $4 to $6 per mmbtu.

SKKMigas has also stated that Indonesia will need to spend at least $24.3 billion until 2030 to develop proper gas infrastructures across the archipelago, including pipelines, liquefaction and regasification facilities. “Indeed, we need massive, integrated infrastructures to boost wider gas utilization that could eventually pave the way for lower gas prices,” said IGN Wiratmaja Puja, the Energy and Mineral Resources Ministry’s director general of oil and gas.

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