However, over the years the subsidy has increased, significantly influencing the fiscal situation. Revenue from the oil and gas sector from 2014 to 2016 shows that of the 1.8 percent contribution oil and gas revenues to the gross domestic product, 1.4 percent is allocated to subsidize fossil fuel production and consumption.

Yet, Indonesia has abundant natural gas, which is relatively clean for the environment compared to oil and coal. Unfortunately, gas use is not yet optimal.

Indonesia was once the world’s most significant gas exporter, with exports estimated to be 45 percent of its total production. Nowadays, gas reserves have declined. Indonesia occupied the 14th position out of 15 countries with the largest proven gas reserves.

The share of Indonesia’s gas reserves to total global reserves was 1.5 percent in 2017.

Assuming the production equals the 2017 production of 102.9 trillion cubic feet, without any additional reserves, natural gas is expected to run out in 43 years.

Amid the decline in oil production and along with transition to renewable energy, the role of gas is crucial as a primary energy source. In the national energy policy, the target for using gas is increasing to 22 percent in 2025, 23 percent in 2030 and 24 percent in 2050.

According to the 2018 Indonesian Gas Balance, one scenario mentions a possible gas deficit from 2025 to 2027.

With such time constraints and deficit potential, Indonesia must be able to use gas as capital for development and not view gas as a commodity that brings revenues.

Gas must be used as a support system for energy security and generate economic development in the regions where the gas resources are located.

Current gas use is 41.41 percent for export and 58.59 percent for domestic needs.

The local gas consumption consists of 23.18 percent for industry, 14.09 percent for electricity, 10.64 percent for fertilizer, 2.73 percent for oil and gas lifting, 5.64 percent for domestic liquefied natural gas, 2.17 percent for domestic liquefied petroleum gas and 0.15 percent for government programs in the form of household gas networks and gas stations.

The industries that are highly dependent on gas, in which gas represents 70 percent of their production costs, are producers of fertilizers, petrochemicals, steel and other metals.

Industries that use gas as fuel are less dependent on gas, such as producers of pulp and paper, ceramics, glass, food and beverages, oleo chemicals, rubber gloves and textiles and footwear.

However, when gas prices rise, all industries are affected.

To optimize gas use, the government should tackle some of the challenges in the management of natural gas along the extractive value chain.

First, licenses for the upstream sector are considered to be heavily regulated. There are 373 permits involving 17 ministries and institutions; the Energy and Mineral Resources Ministry has already simplified the licenses, yet licenses are still needed from 16 other ministries and institutions.

The Policy Performance Index 2018 of the Fraser Institute showed Indonesia’s investment index in the oil and gas sector was in 71st position out of 80 countries, with a score of 47.16. The impact of these “heavy regulations” was decline in investment in oil and gas.

Also, gas reserves are mostly located in the offshore and deep sea waters, so that the period from exploration to production is longer, which affects the economics of a project. Besides, the change from the production sharing contract mechanism to gross split has affected the investment climate.

Fast changes in regulations cause uncertainty for businesses and thus inhibits investments.

Presidential Regulation No. 40/2016 concerning the determination of natural gas prices was issued in 2016. This capped the gas price in the downstream at US$6 per million British thermal units (MMBtu).

However, the policy itself cannot immediately be implemented because the economical prices at each wellhead are different.

For instance, in western Indonesia the average price of gas at the wellhead is $8 per MMBtu; in the central part it is almost $7 per MMBtu and in eastern Indonesia the price is below $5 per MMBtu.

If the government imposes the same price, there should be a government institution facilitating the “cross-subsidy” so the contractors whose prices at the wellhead are above $6 per MMBtu do not lose. Alternatively, the government can reduce its share of revenues, so the gas prices for industries can be in line with the regulation.

Second, most of the gas resources are located in eastern Indonesia, while the vast majority of gas consumers are on Sumatra and Java.

The distance between producer and consumer contributes to the higher price of gas. To encourage a mass market, the government needs to focus on building an integrated gas infrastructure.

Hopefully, after the merger between the two state gas companies, PGN and Pertagas, infrastructure development would become faster and more efficient.

Third, the government, through the downstream oil and gas regulatory agency BPH Migas, needs to oversee the downstream sector, especially by monitoring gas traders who lack facilities or end users.

The phenomenon of the “free rider” escalates gas prices that trigger a higher price for industrial products and influence the competitiveness of the industry.

Fourth, during the transition to renewable energy, strong leadership is needed from the government to implement the National Energy Policy. Gas, with its time constraint, can support national energy needs and decrease crude oil imports.

Therefore, nonrenewable natural resources such as gas, oil and coal will be depleted and we must transit to renewable energy now.

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The writer is a researcher at Publish What You Pay Indonesia.

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