INDONESIA - The Gas Market.

Indonesia's consumption of natural gas this year is expected to reach about 31 BCM, up from 30 BCM in 2002 and 29.7 BCM in 2001. Gas consumption peaked at 31.9 BCM in 1997. Because of the economic crisis, it fell to 27.8 BCM in 1998. It rose to 31.8 BCM in 1999 and fell to 30.6 BCM in 2000, compared to 21.7 BCM in 1991.

The state-owned PT Perusahaan Gas Negara (PGN) is in charge of the local gas market. It is intending to issue bonds to finance part of a planned natural gas pipeline project from East Kalimantan to Java, the heavily populated island where demand for gas is very high. Construction of the project, to cost about $1.7 bn, is to begin in late 2004 or early 2005. PGN's chief William MP Simandjuntak says the size and timing of the issue is yet to be decided and the project's feasibility study is yet to be completed.

The bond plan came after PGN's September 2002 announcement that it was considering selling 20% to 25% of its shares through an initial public offering in 2003 to help fund the gas pipeline. The IPO is expected to raise $300-500m, but PGN would sell another 5% of its shares to strategic partners if that target was not reached. The pipeline is due to come onstream in 2008, delivering up to 1 BCF/d gas to Java.

The state-owned NOC Pertamina is teaming up with PGN to supply gas from its Pagar Dewa field in South Sumatra by pipeline to to West Java and Banten provinces. This is part of an integrated gas development project that will cost at least $500m and is slated to commence this year.

The Asian Development Bank (ADB) is helping to boost the gas sector in Indonesia. The bank's South-Aast Asia Infrastructure Division Director Patrick Giraud explained in mid-2002 that ADB's strategy for this sector is twofold: assisting the government in creating a more conducive legal and regulatory framework for the sector's restructuring with greater private participation, while also providing funds for the development of key gas infrastructure that is less likely to attract up-front private sector investment. ADB has also assisted PGN in the selection of a consortium that took a 40% stake in PGN's subsidiary Transgasindo for $187.6m.

The equity deal was signed in September 2002 by PGN and Transasia Pipeline Co. Transasia, a consortium of Petronas (35%), ConocoPhillips (35%), Singapore Petroleum Co. (15%) and Talisman (15%). The purchase price included $57.6m of new equity to assist in the financing of the South Sumatra-to-Singapore gas export pipeline project. Transasia noted that the rationale behind the sale was to fulfill a condition of the ADB's lending to the Singapore pipeline and the Grissik-to-Duri pipeline onshore Sumatra. In addition it would also introduce "world-class operating, maintenance and financial experience" into the running of Transgasindo.

This was a landmark transaction, the first of its kind in the Indonesian energy sector following enactment of the new Oil and Gas Law in 2001. It marked an important step in the restructuring of the upstream and downstream sectors. Transgasindo was subsequently converted into a foreign investment company.

Trangasindo's main assets are the existing Grissik to Duri gas pipeline and the planned export trunkline from Grissik via Batam to Singapore. PGN is constructing the latter route, which will be transferred at a fixed price on completion in 2003 to Transgasindo. This 468-kilometre pipeline will have an initial capacity of 350 MCF/d. The 536-kilometre Grissik to Duri pipeline, which transports gas from ConocoPhillips subsidiary Gulf Indonesia's Corridor block to Caltex's Duri oilfields, has a 320 MCF/d capacity. Additional compressors are being installed along the line to meet high demand at Duri, a move expected to boost capacity to 427 MCF/d.

BP's Indonesian unit is to build an offshore terminal for liquefied natural gas (LNG) in West Java starting in 2003. The terminal, to start up in 2007, would cost around $310m. The gas will be sold mainly to the state-owned Perusahaan Listrik Negara (PLN). The terminal and its pipelines will channel LNG from BP's Tangguh gas field in the easternmost province of Papua. BP estimates West Java would need additional LNG of 460m BTUs by 2004, which will grow to 760m BTUs by 2007. This will be Indonesia's first-ever LNG regasification facility to help avert a looming energy crisis in Java.

The concept envisaged is a floating regasification plant off West Java that would be supplied with LNG delivered by tanker. The gas would then be transported by pipeline to customers on Java. The plant will initially deliver 500 MCF/d. A BP-PLN study evaluating the potential of using regasified LNG for power generation on Java was completed in late 2002.

Energy demand growth in Java, coupled with a move towards gas usage to replace diesel, will leave West Java facing gas shortages of 500 MCF/d by 2005. At present, PLN's West Java plants and industries use 600 MCF/d of gas and 500 MCF/d of gas equivalent of diesel. Customers will save about $416m annually if diesel is substituted by 500 MCF/d of gas, based on a $28/b oil price. The Power Sector: Indonesia is short of power generating capacity. PLN warned in early 2001 that 21 regions would suffer power shortages in the near future, including Aceh, Bangka, Bengkulu, Jambi, Pontianak, Lombok, Ambon, Balikpapan and Papua. It said power demand in the heavily populated islands of Java and Bali would reach 17,167 MW by 2003, while installed capacity was 19,697 MW, leaving a reserve margin of only 14.7% instead of the minimum 30% required. This could lead to a power crisis.

Relations between the government and the 27 IPPs in Indonesia have been on a low ebb since the 1997-98 economic crisis. Some approved power projects were cancelled during the crisis (see background in Vol. 56, DT 9).

In mid-2002 Unocal Geothermal Indonesia (UGI) and Dayabumi Salak Pratama (DSPL), a 50% investee of UGI, signed an agreement with PLN and Pertamina over pricing and production issues at the Gunung Salak project in western Java. This is a 330-megawatt geothermal steam and power generation project where UGI - as a contractor to Pertamina - operates the steam fields and delivers the output to PLN. PLN operates three generation plants at Salak. UGI also delivers steam to DSPL for three other plants that supply power to PLN on Pertamina's behalf. The agreement extended the contracts to 2040 and included a commitment from PLN to take as much steam and electricity as possible to meet burgeoning demand in the Java-Bali power distribution system. It also reaffirmed the government's guarantee of PLN's obligations to UGI, DSPL, Pertamina and Gunung Salak's lenders. With this deal in place, Unocal expected 2002 net earnings from its global geothermal and power business to be $40-50m compared to $11m in 2001.

Unocal is negotiating with PLN and Pertamina for long-term solutions under the contracts for the Sarulla geothermal project onshore Sumatra and the Wayang Windu venture on Java. Unocal operates Sarulla, which was suspended five years ago due to Indonesia's economic crisis. Unocal has 50% in Magma Nusantara that operates a 100 MW power plant and a related steam field in the Wayang Windu contract area. Unocal provides operations and maintenance services for this project as well.

State-owned Philippine National Oil Co. Energy Development Corp. (PNOC-EDC) in August 2002 signed a $600m JV deal with Pertamina to build three geothermal plants in South Sumatra, North Sulawesi and Lampung. The power output will be sold to PLN.

In February 2003 the US government rejected Jakarta's request to intervene in American court hearings into a dispute between Pertamina and Karaha Bodas over a geothermal IPP that was supposed to be built in Indonesia. In 2002 Karaha Bodas, whose main investors are US firms FPL Energy and Caithness, had appealed against a Jakarta court decision overturning an international ruling that Pertamina should pay it $261m compensation over the project. Karaha entered into contracts with Pertamina and another Indonesian company in 1994 to develop the Bodas geothermal project on the island of Java. But the project was shelved in 1998 after Karaha had invested some $100m, which prompted the US-based company to turn to the international arbitrators. Pertamina was subsequently ordered to pay $261m but failed to so do. This led the IPP to freeze some $275m of Pertamina's international assets, including $130m by the Bank of America.