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Jakarta Post

Frustratingly high gas prices

  • Editorial Board

    The Jakarta Post

Jakarta   /   Tue, January 14, 2020   /   08:02 am
Frustratingly high gas prices Two workers of state-owned gas company Perusahaan Gas Negara (PGN) check pipelines of gas channeled to power generator PT Indonesia Power at a gas meter station in Tambak Lorok, Semarang, Central Java. (JP/Suherdjoko)

The government’s move to address the soaring price of domestic gas is what industry players have been waiting for, but this could be another false hope. A presidential regulation was issued four years ago to set a price cap of US$6 per million British thermal unit (mmbtu), but the gas is being sold at $8 to $9 per mmbtu.

The high gas price has severely hurt industry, especially manufacturers of chemicals, food products, ceramics, steel, fertilizers and glass.

Indonesia is one of the world’s largest gas producers, but ironically, its gas price is among the highest in Southeast Asia. The domestic price of gas ranges from $9 to $11 per mmbtu, far exceeding $6 to $8 per mmbtu in neighboring countries.

President Joko “Jokowi” Widodo could not hide his disappointment over the inconvenient truth during a limited Cabinet meeting last week, when he offered three options for reducing the gas price: increasing gas imports, implementing the Domestic Market Obligation (DMO) policy and reducing or even eliminating state revenue from
gas sales.

While the government is showing good will toward solving the problem, these options need to be reviewed to prevent creating new problems.

Resorting to imports to meet domestic gas needs is clearly a setback, since the government has decided on a policy to reduce imports. The move could also discourage gas exploration at home.

Meanwhile, implementing the DMO policy like in the coal industry is easier said than done, because all domestically produced gas involves long-term contracts with foreign buyers.

If the third option is taken, the government stands to lose a large amount of revenue from gas sales, which have contributed significantly to state revenue. It would be unwise for the government to sacrifice gas revenue at a time when the country needs it most to cover the budget deficit, which has increased due to a shortfall in tax revenue.

The fact is that domestic gas is expensive because of high transportation costs, as it mostly is distributed to end users through hundreds of kilometers of pipeline. The gas fields are located in remote areas on land or offshore in Sumatra, Java, Sulawesi, Kalimantan and Papua.

Gas produced in Java and Sumatra is used locally, while gas produced in Kalimantan, Sulawesi and Papua is exported to Japan, South Korea and China under long-term contracts.

There is no short-term solution to the high price of gas, unless state gas distributor PT PGN cuts its delivery cost. This option, however, would have an insignificant impact on reducing the current price of gas.

The problem can be resolved only by taking a long-term approach to reviewing the gas policy, such as by reducing the export allocation and renegotiating prices at the end of the current contractual period with gas producers.

It is also important that the government boosts the production of liquefied natural gas delivered to areas where the gas pipeline network does not reach.