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Fertilizer industry given priority in gas supplies.


Natural gas is used as energy source and industrial basic material in Indonesia. Natural gas is used as feedstock in industries like petrochemical, fertilizer and steel industries. It is a major export earner. In line with the Oil and Gas Law No. 22 of 2001, the government gives the priority to domestic industries in natural gas supplies. Natural gas is expected to be higher in demand in the future in the country with the dwindling reserves and soaring prices of crude oil.

The country is known to have huge gas reserves, but it has the problem in developing its gas reserves as they are located in various areas far from the market or consumers. Networks of gas transmission pipes, therefore, have to be built that will need large investment.

The manufacturing sector is expected to continue to face shortage in gas supplies in the next several years as consumption is growing faster than production. In addition, major gas fields have all been bound by contracts with foreign buyers even before they start production such as Tangguh in Papua. The Tangguh Liquefied Natural Gas (LNG) plant is expected to start commercial operation soon but the governmnent has been bound by contracts to set aside most of its LNG production for foreign buyers including from South Korea, China and America. The old LNG plants of Arun and Bontang also are bound by contracts with foreign buyers mainly Japan, Korea and Taiwan. The government, however, has pledged to give priority for domestic industries in gas supplies in the coming years its guarantee supplies for domestic industries meet domestic requirement.

Gas requirement plan for manufacturing sector

Based on the master plan of Gas Requirement for the Manufacturing Sector launched in May 2006, deficit in gas supplies in the country will widen to 1,601.9 million cubic feet per day (mmscfd) in 2010 up from 1,362.6 mmscfd and the deficit will be larger to 5,281.1 mmscfd in 2015. The government, therefore, is set to see a 30% increase in the country production of gas in the next three years. Increase in production is expected mainly from Tangguh, and the Senoro and

Matindok gas fields in Sulawesi.

Natural gas is vital as the main feedstock for urea fertilizer industry. The country has a number of large urea fertilizer factories and a number of them have suffered shortage in gas supplies.

In the period of 2003-2007, there were sale and purchase contracts for 13,33 TCF of gas between producers and domestic consumers in the country. Late 2007, contracts valued at US$ 6.79 billion were signed for 1,672.13 triliun British Thermal Unit (BTU).

The buyers were fertilizer companies such as Pupuk Iskandar Muda and Petrochemical Gresik with suppliers KEI Ltd and Medco Malaka with contracts valued at US$ 1.69 billion for 389.5 trillion BTU of gas until 2010.

Since 2000, the country's fertilizer industry has suffered shortage in gas supplies. In urea fertilizer industry gas accounts for 50%-60% of the production cost. The availability of gas with reasonable price is, thereforee, vital to guarantee the survival of the industry.

Shortage in gas supplies has resulted in stoppage of the operation of. PT Asean Aceh Fertilizer (AAF) since 2000. The company, which was established by the founding members of Asean has been liquidated after being lying idle for several years. PT Pupuk Iskandar Muda (PIM), a state urea fertilizer factory in Aceh, was also forced to suspend the operation of one of its factories. Its second factory resumed operaiton only on April 15, 2008 with gas supplied under swap arrangement with Pupuk Kalimantan Timur (PKT), also a state fertilizer company in East Kalimantan. Ironically, both AAF and PIM are located in Aceh, which is know to have large gas reserve developed by PT. Arun NGL. PT. Arun, however, produces LNG for exports under long term contracts with buyers from Japan and South Korea, and now, gas from the Arun field is barely enough to keep the LNG plant in operation.

Gas production

In a bid to better guarantee supplies of gas for domestic consumption, the energy and mineral resources minister has issued a ministerial regulation No. 2/2008, requiring holders of cooperation contract (KKKS) to set aside 25% of their share of production for domestic market for which the government offers subsidy incentive in the form of domestic market obligation fee (DMO fee) based on the cooperation contract.

In the 2003-2007 periods, the country's production of gas has continued to decrease. Production dropped average by 2.95% to 2,783,168,532 MSCF in 2007 from 3,136,000,115 MSCF in 2003. Meanwhile, Chevron which succeeded in increasing its output by 2 million tons from deep water operations off East Kalimantan and Total Indonesie which also succeeded in expanded its production by 5 million tons from its gas fields in East Kalimantan. Part of the additional production will be shipped to Java.

In 2008, the government has set production target for gas at 9,946 MMSCFD and the target is increased to 10,969 MMSCFD in 2009.

Development of gas fields for fertilizer industry

The government has called on gas contractors to increase production and encourage development of new gas fields to guarantee supplies of gas for fertilizer industry .

Among new gas fields is the A Block in Aceh. The A block together with gas from Krueng Mane off shore field are expected to cope with shortage in gas supplies in Aceh. The A Block has a reserve of around 596 BCF. It was formerly awarded to ExxonMobil Oil Indonesia and ConocoPhillips before it was taken over in April 2006 by a consortium of Medco E&P, Japan Petroleum Exploration, and Premier Oil, with Medco E&P as the operator. The block is expected to start producing gas in 2010.

Development of the A block, estimated to cost US$600 million, is expected to supply gas for the two units of Pupuk Iskandar Muda - PIM-1 and PIM-2. Supply to PIM-1 and PIM-2 is expected to start in November, 2010 under six year contract for 110 MMscfd.

The government agreed to give a high production split of 49% for the contractor in the A Block considering the risk and the relatively high CO2 content of 23% in the gas.

The Tangguh gas field, which is operated by BP, which also supply the remaining LNG production not bound by contract with foreign buyers, for PIM through swap with Pupuk Kaltim.

Shortage has also been reported in East Java because of a decline in production of the Pagerungan gas field . BP Migas has sought to accelerate development of new gas fields including Ujung Pangkah Gresik, which is operated by Amerada Hess), Oyong and Maleo operated by Santos, Wunut by Lapindo Brantas, KE by Kodeco and BD Madura block by Exxon Mobil.

Currently the Kangean block is operated by PT. EMP Kangean which acquired it from BP Kangean in August 2004. EMP will operates the block until 2010 under contract extension. With an additional investment of US$600 million, PT EMP Kangean Ltd Tbk increased its production by 300 (MMSCFD) in 2007 from the Kangean block in East Java. The company invested in 2005, US$200 million in the Pagerungan field and US$ 400 million in the Terang Sirasun field. Terang Sirasun field started production in the last quarter of 2007.

Additional supplies form the Kangean block is used for power generating plants in East Java and fertilizer company PT. Petrokimia Gresik (PKG) in that province. PKG has made a long term contract to secure its gas supplies in the future.

In general, the increase in gas requirement could still be met with additional supplies such as from Conoco Phillips and Pertamina in Sumatra sent through South Sumatra-West Java (SSWJ) pipeline, JOB Jambi Meran, and Medco gas fields in South Sumatra. In addition, there were additional supplies from Santos, EMP, Husky, Kepodang and Cepu in East Java. More supplies are also expected to come from the Bojonegoro gas field of Exxon and gas fields of JOB Pertamina--Petro China in Legowangi, Gresik.

In 2010, new potential gas fields include Mahakam Block of Total expected to start production in 2011, five deep water fields in East Kalimantan operated by Chevron expected to start operation in 2014-2015. The Masela gas field of Inpex in eastern Indonesia is expected to come on stream in 2015 and the Tangguh LNG plant with three trains is to contribute to domestic supplies in 2013-2014.

Domestic gas requirement

Based on official data at the Upstream Oil and Gas Regulatory Agency (BP Migas), the country's gas production in 2006 totaled 8,280 MMSCFD, and around 5,373.MMSCFD or 64.9% of the production were exported with the remaining 2,907 MMSCD or 35.1% for domestic consumption. In 2007, production totaled 8,901 MMSCFD, and exports fell to 5,599 MMSCFD (62.9%) and domestic supplies rose to 3,302 MMSCFD (37.1%)

Meanwhile, sale and purchase contracts signed with domestic consumers in 2007 involved 2.78 TCF. Altogether in the 2003-2007 periods, contracts signed with domestic consumers totaled 13.33 TCF including 5.33 TCF (40%) for the power generating sector, 5.19 TCF (39%) for the manufacturing sector and 2.81 TCF (21%) for the fertilizer sector.

BP Migas said domestic consumption of gas is predicted to grow 5.3% annually until 2010 from 4.2 billion cubic feet per day (BCFD) in 2007 to 6 BCFD in 2010.

The increase in gas consumption followed the rise in the oil fuel (BBM) prices. In addition, the government has encouraged the use of gas instead of BBM.

Gas Supply Contracts with Industries

Gas supply contracts signed between producers and domestic consumers in 2007 were valued at US$ 6.79 billion. Among the domestic consumers were PT Petro Kimia Gresik with supplier KEI Ltd, and PT Pupuk Iskandar Muda (PIM) with supplier Medco Malaka. The two contracts were valued at US$ 1.69 billion for 389.5 trillion BTU until 2010.

A number of other fertilizer factories like PT Pupuk Kujang have yet to wait for the government's decision on gas supply for them. Kujang 1B factory, which was commissioned only in 2006, has only a three year supply contract to end in December 2008. Kujang IB was guaranteed with gas supplies by Pertamina from its L-Parigi well in the Java Sea off West Java at a price of US$ 2.55 per mmbtu. Pertamina supplies 48 million cubic feet per day to the fertilizer plant. Supplies to Kujang 1A, are provided by BP Indonesia form its off shore field in the Java Sea also to expire by the end of 2008.

Gas supplies for Petro Kimia Gresik (PKG) are also not yet secured. The supplying capacity of EMP Kangean for PKG has been on the decline down around 5 mmscfd every month.

PIM supplied by Petronas

The Tangguh Liquified Natural Gas (LNG) plant will sell gas to foreign buyers under long term contracts such as with Sempra Energy LNG Corp. of the United States for 1.8 million tons a year, with Kogas of South Korea for 1 million tons and Tokyo Gas of Japan for 500,000 tons. The rest will be appropriated for PIM under swap arrangement with Pupuk Kaltim (PKT).

Gas swap between PKT and PIM started in May, 2008 for 3 cargoes (1 cargo = 125 metric tons), through offshore pipes of ExxonMobil. The gas supplies are expected to suffice only for six months as PIM needs at least 6 cargoes a year. Around 120 MMSCFD will be needed for urea fertilizer factories in Aceh PIM 1, PIM 2 and AAF (now closed), which had a total produciton capacity of 1.8 million tons a year.

In addition to supplies from PKT, PIM will have gas supplied by Petronas Petroliam National Berhard (Malaysia state company) at a price of US$18 per million Btu (British thermal unit) based on prevailing international price of US$780--US$800 per tons. Petronas will supply six cargoes for two years under a swap arrangement until the A Block comes on stream. Medco, the operator of the A Block has agreed to supply PIM (PIM-1 and PIM-2) 110 MMscfd/million standard cubic feet per day) starting the fourth quarter of 2010

Petronas has agreed to set aside LNG supplied from ExxonMobil for PIM-2 until 2010 under a US$ 324 million contract. Petronas will pay for the processing fee to PIM and Petronas will also fully pay for the swap cost to be compensated with a profit sharing of 50:50 with PIM on the urea sales.

The swap contract with PKT, is valued at US$3.5 per million Btu (British thermal unit) lower than the price of gas from Arun, which is priced at US$4 per million Btu. PIM 1 and 2 suspended operation in 2007 after he termination of contract with Exxon. The factories were able to resume operation only in January 2008. BP Migas has ordered ExxonMobil and PT Pertamina to supply 110 MMSCFD of gas for PIM starting this year until 2010.

On 30 December 2007, the contract of Arun-2 with Japanese buyers expired.

Based on the National Gas Balance, issued by the energy and mineral resources ministry in April 2007, there was a surplus of gas in Arun after being deducted with supplies under contracts with foreign buyers. The surplus is estimated at 250 MMSCFD in 2008, around 210 MMSCFD in 2009 and 153 MMSCFD in 2010. Gas needed by PIM for its two factories is only 110 MMSCFD or less than the surplus that means more gas will be available to feed the LNG plant for exports for LNG to Japan.

The Arun LNG contract with South Korea will expire only in 2014.

The government has decided to reduce gas exports from Arun to guarantee supplies for PIM. Exports of LNG to Japan will be cut by 12 cargoes or 1,440 MMscfd in the period of 2008-2010. The Japanese buyers have agreed to the supply cut . The Arun LNG plant operated by Exxon Mobil previously produced 76 cargoes a year for exports to Japan and Korea. LNG is also exported to the two countries from Bontang in East Kalimantan.

PT Pupuk Kujang supplied by BP Indonesia

The Kujang IA unit of PT Pupuk Kujang Cikampek (PKC) received gas supplies from BP Indonesia since early 2007 after the expiration of contract with Pertamina in April 2006. PKC signed the new contract for 135 billion British thermal unit (BTU) to last until 2017. The gas is supplied from Offshore North West Java (ONWJ) block at a price of US$ 3.63 per mile British thermal unit (mmbtu).

The price is considered profitable for both sides. Pupuk Kujang is able to pay a higher price for gas. Previously fertilizer factories paid only US$ 1.5 - US$ 2 per mmbtu.

Gas supplies for PT Pupuk Kaltim come from small gas wells in East Kalimantan including ones operated by Total EP Indonesia, Vico and Chevron. Kaltim-3 gas contract expired on 31 December 2007. Until now PT Pupuk Kaltim has not signed new contract to secure gas supplies. Kaltim-3 needs 55 MMSCFD of gas.

Gas supplies for PT. Pupuk Sriwijaya (Pusri) come from PT. Medco E&P Indonesia. Medco E&P supplying 259.2 billion British thermal unit (BBTU) under a 15-year contract valued at US$866.3 million starting 1 January 2008. Medco sends 45 BBTU per day from its gas fields in the block of South & Central Sumatra Extension (SSE). The gas is sent through pipelines of Pertamina spanning a distance of 130 km to the Pusri factories in Palembang.

PT. Petrokimia Gresik has its gas supplies from Kodeco Energy Co Ltd. under a contract for 26.3 trillion British Thermal Unit (TBTU) starting January, 2007. The contract valued at US$120.81 million will be effective until 2011. In 2007, Kodeco supplied Petrokimia Gresik with 7 billion British Thermal Unit (BBTU) everyday and the daily supply will be raised to 20 BBTU in 2008.

Government subsidy

The government almost doubled the subsidy on fertilizer by Rp7.375 trillion to Rp15,1 trillion in 2008. The subsidy is needed as the government has set the price of fertilizers under decision of the agriculture minister No 107/Kepts/SR.130/2/2004. The subsidized price was Rp 1,050 per kilogram of urea or US$100 per ton.

Fertilizer producers could pay only US$2 per mmbtu far below the prices accepted by PLN and PGN.

Through a decision of the finance minister No 356/KMK.06/2003, the government provides gas subsidy to reduce potential loss suffered by fertilizer producers, which are all state companies. The subsidy, however, is not enough to cover the potential loss as gas is only one of cost elements which have also increased in price.

Gas prices up

In mid 2007, PT Pertamina raised its gas selling price for industries to US$ 6.4--US$ 7 per MMBTU from US$ 3-4 per mmbtu

Meanwhile, gas price in international market is around US$ 13 per mmbtu to follow the trend in the crude oil market. The high price has prompted producers or contractors to increase their exports.

The price of gas on the domestic market is relatively lower than BBM . A power plant uses gas only at US$ 3 - 4 per MMBTU. The cost could reach US$15-16 per MMBTU by using diesel oil.


The soaring prices of crude oil in the wolrd market had forced the government to raise the BBM prices in the country. The BBM price hikes resulted in growing demand for gas as an alternative source of energy.

The country has suffered growing deficit in gas supplies to domestic industries because of the policy which has been more oriented to export market.

Most of the country's gas production has been exported under long term contracts. The policy has caused difficulties at present with fast growing demand on the domestic market. The government, therefore, needs to revise its policy. In fact the government has said it would reduce exports to guarantee domestic supply. Priority will be given for domestic industries.

Producers including foreign contractors are interested in exporting their production as the prices in international market are much higher especially as the government still provide subsidy on gas. Gas producers in the country are more interested in selling their gas to the energy sector which offers a higher price. The government has guaranteed supply of gas for fertilizer industry in 20 years and encouraged development of new gas fields to prevent shortage in supply that has caused the closure of Asean Aceh Fertilizer (AAF).

Indonesia's gas production, 2003-2007

 Production of gas Growth (%)
Year (MSCF)

2003 3,136,000,115 --
2004 3,029,904,958 -3.4
2005 2,984,150,215 -1.5
2006 2,947,048,632 -1.3
2007 2,783,168,532 -5.6

Average growth -2.95

Source: ESDM


Development of gas fields

Gas fields Gas reserves Contractors

A Blok, Aceh 596 BCF Medco, Japex and
 Premier Oil
Tangguh, Papua 14.4 TCF BP Plc
Terang Sirasun field, 70 BCF PT.EMP Kangean
Kangean Block, East Java
Legowang field, Gresik, JOB Pertamina-Petro
East Java China
Bojonegoro Exxon

Source : ICN


Domestic gas consumption, 2003-2007

Description Total (TCF) %

Gas sale and purchase contracts 13.33 100.0

Domestic consumption:

1. Power sector 5.33 40.0
2. Manufacturing sector 5.19 39.0
3. Fertilizer sector 2.81 21.0

Source: BPH Migas


Gas supplies for fertilizer industry

Contractors Fields Consumers Total

Exxon Arun PIM 110 MMSCFD
BP Tangguh, PIM 375 metric tons

Petronas PIM 10 MMSCFD
Pertamina L -Parigi Kujang IB 48 MMSCFD
BP Offshore North Kujang IA 135 BBTU
 West Java
Medco E&P Block of South Pupuk 259.2 BBTU
 & Central Sriwijaya
Kodeco Offshore East Petrokimia 26.3 TBTU
Energy Co. Java Gresik
Pertamina Pupuk Kaltim 1 214.5 BSCF
Pertamina Pupuk kaltim II 247.5 BSCF
Pertamina Pupuk Kaltim III 178.2 BSCF

Contractors Period

Exxon 2008-2010
BP May 2008-November
Petronas 2008-2010
Pertamina 2006-2008
BP 2007-2017
Medco E&P 2008-2023
Kodeco 2007-2011
Energy Co.
Pertamina 2001-2011
Pertamina 2003-2013
Pertamina 2008-2018

Source: Pertamina/ICN


Gas prices on domestic and international markets.

Description 2006 2008

Domestic price US$ 3--US$ 4 US$ 6.4--US$ 7
International price US$ 13

Source: ICN
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Title Annotation:INDUSTRY
Comment:Fertilizer industry given priority in gas supplies.(INDUSTRY)
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Sep 1, 2008
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