Indonesia faces daunting challenge of bridging gas imbalance
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.