In­done­sia faces daunt­ing chal­lenge of bridg­ing gas im­bal­ance

The Jakarta Post - - OPINION - Abache Abreu The writer is se­nior edi­tor, LNG News and Anal­y­sis (Asia-Pa­cific and Mid­dle East) at S&P Global Platts. This is a per­sonal view.

In­done­sia’s plans to bal­ance its do­mes­tic nat­u­ral gas mar­kets face huge chal­lenges as up­stream out­put de­clines and do­mes­tic con­sump­tion rises. While liq­ue­fied nat­u­ral gas (LNG) can bridge the sup­ply deficit, it re­quires costly im­port and trans­port in­fra­struc­ture.

The coun­try’s up­stream oil and gas sec­tor is faced with ag­ing fields, dwin­dling pro­duc­tion and fall­ing in­vest­ment. This comes amid fast ris­ing gas de­mand, driven by grow­ing con­sump­tion from the power and in­dus­trial sec­tors.

As a re­sult, LNG im­ports are due to in­crease sig­nif­i­cantly, even­tu­ally turn­ing In­done­sia, one of the world’s largest and old­est LNG sup­pli­ers, into a net im­porter of the fuel by the mid-2030s.

But In­done­sia not only needs more LNG sup­ply to solve its gas prob­lems. It also needs a rapid coun­try-wide ex­pan­sion of its re­ceiv­ing LNG in­fra­struc­ture, and en­sure do­mes­tic end users are able to pay pre­mium prices for small-scale LNG de­liv­er­ies.

In­done­sia’s ex­plo­ration and pro­duc­tion sec­tor has been grap­pling with fall­ing in­vest­ment, due to four years of sus­tained low oil prices, ex­ces­sive bu­reau­cracy, le­gal un­cer­tainty, unattrac­tive fis­cal terms and the ab­sence of re­li­able re­source data.

The coun­try’s new re­serves are lo­cated in in­creas­ingly re­mote and more tech­ni­cally chal­leng­ing ar­eas such as deep water, while com­pa­nies have been rolling back plans for high risk ex­plo­ration amid struc­turally low com­mod­ity prices.

The sec­tor’s com­pet­i­tive­ness has been fur­ther af­fected by a rise in global competition, as more coun­tries are step­ping up ef­forts to at­tract cap­i­tal in­vest­ment amid a down­turn in the sec­tor.

In­done­sia’s up­stream in­vest­ment fell 27 per­cent to US$11.15 bil­lion in 2016 from $15.34 bil­lion in 2015, and ex­plo­ration shrank to 199 ar­eas from 228 over the same pe­riod, ac­cord­ing to up­stream reg­u­la­tor SKK Mi­gas.

The In­ter­na­tional En­ergy Agency last month slashed In­done­sia’s 2040 nat­u­ral gas pro­duc­tion fore­cast to 90 bil­lion cu­bic me­ters, down by 45 Bcm from its pre­vi­ous out­look pub­lished in 2015. It cited con­straints in the de­vel­op­ment of re­sources like East Natuna, Asia’s largest un­tapped gas field off­shore Western Kal­i­man­tan, es­pe­cially in the face of low LNG prices glob­ally.

On the other hand, gas con­sump­tion is grow­ing by ap­prox­i­mately 4 per­cent an­nu­ally, driven by de­mand from the power and in­dus­trial sec­tors — and will out­pace sup­ply in the next decade.

With In­done­sia’s gas sur­plus turn­ing into deficit and no pipe­line net­work con­nect­ing the sur­plus ar­eas in Bor­neo, Su­lawesi and Pa­pua with the deficit de­mand cen­ters across the ar­chi­pel­ago, LNG con­sump­tion is ex­pected to in­crease rapidly.

LNG de­mand through 2018 and 2019 will still be met by do­mes­tic pro­duc­tion, although at the cost of lower LNG ex­ports.

In­done­sia has sup­ply con­tracts for over 3 mil­lion met­ric tons of LNG a year with do­mes­tic pro­duc­ers, and this is ex­pected to in­crease to more than 6 mil­lion mt/year from 2020, af­ter a deal signed by state-owned util­ity Perusa­haan Listrik Ne­gara in 2016 to re­ceive around 3 mil­lion mt/year from the BP-led Tang­guh project.

From 2020, In­done­sia is ex­pected to start im­port­ing LNG from the in­ter­na­tional mar­kets, in­clud­ing over 4 mil­lion mt/year Per­tam­ina has con­tracted from global LNG sup­pli­ers.

Fi­nally, solv­ing In­done­sia’s nat­u­ral gas im­bal­ance needs not only ad­di­tional LNG im­ports, but also a rapid ex­pan­sion of its im­port in­fra­struc­ture and down­stream prices that make smallscale LNG de­liv­er­ies sus­tain­able in the long run.

In­done­sia has three LNG ter­mi­nals, com­pris­ing the on­shore Arun LNG fa­cil­ity in north­ern Su­ma­tra, the float­ing, stor­age and re­gasi­fi­ca­tion unit Nu­san­tara Re­gas in West Java and the FSRU Lam­pung off south­ern Su­ma­tra.

Ad­di­tional ter­mi­nals are planned to be built in or­der to bring the fuel across In­done­sia’s is­lands, and many of those de­mand cen­ters will only have the ca­pac­ity to re­ceive medium or small LNG car­goes, which re­quire ad­di­tional break-bulk in­fra­struc­ture in­vest­ment.

Ear­lier this year, Min­is­ter for En­ergy and Min­eral Re­sources Ig­na­sius Jo­nan told lo­cal me­dia the gov­ern­ment was con­sid­er­ing us­ing Sin­ga­pore’s LNG terminal on Jurong Is­land to reload In­done­sia-sourced LNG into smaller ves­sels for de­liv­ery into In­done­sia’s small-scale ter­mi­nals.

But the cost of LNG break­bulk is high, and even more so for medium and small LNG car­goes.

The cost of LNG is also ris­ing. Af­ter four years of low spot prices sup­port­ing base load de­mand cre­ation in In­done­sia and other emerg­ing mar­kets, grow­ing de­mand from China has pushed prices to­wards three-year highs.

Given In­done­sia’s down­stream gas prices are heav­ily reg­u­lated, the abil­ity of do­mes­tic end users in In­done­sia to pay a pre­mium re­mains to be seen.

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