Global Business Guide Indonesia

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Business Updates | Will Indonesia Become a Net Importer of Natural Gas by 2020?

The notion that Indonesia could become a net importer of natural gas by 2020 may seem absurd because it has the eighth largest proven gas reserves in the world; some 108 trillion cubic feet (Tcf), which are enough to power the country at current rates of production for the next fifty years, reports the Review of World Energy 2014.

Despite this rich endowment, Indonesia could yet be facing net gas shortages by the end of the decade. Three factors contribute to this possibility. First of these is the predominance of natural gas exports under long-term contracts. Indonesia is the world’s fourth largest LNG exporter after Qatar, Malaysia and Australia, reports the International Gas Union Annual Report, 2014. Secondly, shortages may arise because of insufficient long-term investment in exploration and development of gas fields, as Michael Buehler, Lecturer at SOAS, University of London, points out. “No significant new fields have been discovered and the government does not seem to make investment in infrastructure in the sector a priority".

Closer to home, the Indonesian Petroleum Association predicted late last year (2014) that the funds invested for exploration could fall by 20% this year (2015). In addition, development of new blocks, such as Chevron’s $12 billion USD Indonesia Deepwater Development (IDD), have been delayed partly due to a bureaucratic failure to extend various permits and partly because of the government requirement that at least 25% of the output be reserved for domestic consumption. The third factor is Indonesia’s inadequate distribution infrastructure. This is due as much to lack of investment as to its geographical make-up which favours distribution by tanker over pipeline as the most prolific blocks of natural gas reserves are located far distances from major demand centres.

The IEA forecast a doubling of domestic demand for gas over the next two decades and some industry commentators estimate demand increasing between 6-7% a year for the rest of the decade, driven by an expanding power sector and major industrial users switching to gas. In the absence of considerable investment in E&P, domestic distribution infrastructure construction and reform of energy subsidies as well as rising domestic demand threaten not only the ability to export, but also the availability of funds for infrastructure investment.

However, a new President, Joko Widodo, with an ambitious reform programme has been elected which could mark a turning point In Indonesia. President Joko Widodo has taken the opportunity, afforded by the international collapse in oil prices, to slash and cap fuel subsidies by some 120 trillion Rupiah in the financial year 2015-2016, thereby releasing around $18 billion USD for his reform programmes.  

In 2013, 52% of Indonesia’s natural gas production was exported overseas. Under short-term pressure from domestic demand for natural gas, Indonesia has had to buy spot LNG cargoes to meet its export obligations. To ensure adequate supplies for domestic consumption in the medium and long term, the government has increased the proportion of gas production reserved for domestic consumption, which in practical terms, means an increase to 23.4 Tcf this year from 22.7 Tcf last year, according to data published by the regulator. In December 2014, the state-owned energy firm PT Pertamina (Persero) signed its first import contract with Cheniere Energy Inc. to receive 1.52 million metric tons of LNG per year for 20 years starting in 2018, reports World Oil, January 2015.

Whilst gas production must increase to contribute to the expected expansion of generating power capacity, state-owned oil and gas company, Pertamina, is planning improvements to support gas deliveries to domestic buyers. The plan is for a nationwide distribution network beyond Java, to link up with new gas power plants and fields throughout the country, including a new pipeline linking Kalimantan gas fields with Java. However, given the current low energy prices, foreign investment in Indonesian gas projects is likely to slow as energy companies seek to cut their capital spending.

Whether, and how fast, these plans come to fruition will depend upon the resolution of a host of issues. According to Ismail Akbar, Head, of Media & Market Intelligence - Indo Cognito, “These include - regulatory uncertainty, complicated bureaucracy and business permit procedures (involving too many institutions and authorities), not counting the mafia”. He adds, “In the oil & gas sector, lack of accurate geological data for exploration purposes has become quite an issue together with a lack of adequate tax incentives.”

For investors, investment in energy is a long game. All are agreed that the new President has made an audacious start “but the actual ‘reform’ will surely take time” says Akbar. And he adds, “Given the crash in energy price, some business will see this as an opportunity and speed up their business development but some others most likely will ‘hold’ any investment plan – the best they might want to do in this case is probably secure a contract extension”.

Despite a reforming President, the prospects for substantially increasing gas production to meet demand at home and abroad without imports of gas look poor in the short run. It can take up to eight years to construct a new gas field from scratch and the preliminary exploration phase has yet to really start. Against this background one might reasonably predict that Indonesia will find itself under pressure to turn to Singapore’s new gas hub by 2020.

Global Business Guide Indonesia - 6th March 2015

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Indonesia Energy Snapshot

Contribution to GDP: 3.44% (2016) Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).