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Indonesia - The Gas Market.

In January 2011, the then upstream regulator BPMigas (since its dissolution on Nov. 13, 2012 replaced temporarily by SKKMigas) said the domestic market for natural gas in that year required 4,366 MCF/d (excluding gas re-injected into the oilfields). But SKKMigas in early 2013 said this year's gas consumption in Indonesia was to average about 4,300 MCF/d, lower than in 2011, with exports in LNG and LPG forms to reach 4,136 MCF/d.

SKKMigas officials recently said Indonesia this year will continue to import LNG for the domestic market to cover a national gas supply deficit. They explained that LNG export commitments had to be met because, otherwise, any supply cuts were to cost Jakarta more than what the country would pay in the difference resulting from imports.

Jakarta ensured that industrial companies were to receive sufficient gas supply in 2011. It was to raise the gas supply to them from the 2010 level of 1,203.18 MCF/d to 1,690.43 MCF/d in 2011, as stipulated in natural gas supply contract for that year.

The Energy and Mineral Resources Ministry's oil and gas division in September 2012 said it was focusing on the domestic gas pipeline for Java before moving on to the region's Trans-ASEAN export gas pipeline. It said the ministry expected the domestic project, which will connect Bekasi, West Java via Cirebon and Gresik in Central Java with Semarang on the northern coast of Java, to begin operations in 2014.

The Sumatra pipeline project was expected to connect the gas receiving terminal in Arun with Belawan. Both are in North Sumatra. The ministry then said it had no plan to build pipelines in other regions, such as Kalimantan, because of the challenging terrain.

The executive director of ReforMiner, Pri Agung Rakhmanto, in September 2012 said he backed the government's idea to prioritise domestic pipelines. He explained: "For Java, our pipeline network is still disconnected between Gresik and Semarang. In the coming years, there will be some urgency in fulfilling our increasing domestic gas needs". He added that the Trans-ASEAN pipeline project was still at the level of an MoU and had as yet unclear targets about when it would be built.

The partly privatised PT Perusahaan Gas Negara (PGN) is the biggest supplier to domestic users. To increase its supply and thus help the government limit demand for oil, PGN is having LNG/re-gasification units built in several parts of the archipelago as these are relatively less costly than having pipelines built between the islands.

Countries importing large quantities of Indonesian LNG, particularly Japan and South Korea, are closely watching Jakarta's changing gas policy in favour of the domestic market. Since late 2007, they have been scrambling to lock in supplies (see gmt12IndnsGasExptMar18-13).

PGN has built a pipeline from East Kalimantan to Java, the heavily populated island where demand for gas is very high. The pipeline, on stream since 2008, can deliver 1,000 MCF/d to Java. PGN operations were boosted in early 2009 with the completion of its South Sumatra to West Java pipeline. The 270-km, 32-inch parallel trunkline between Pagardewa and Labuhan Maringgai was commissioned in the autumn of 2008, when the Pagardewa compressor station began operations. A total of 480 MCF/d of South Sumatran gas is flowing to West Java. These are examples of PGN efforts to supply pipeline gas to rapidly expanding domestic markets.

PGN originated from Firma LJN Eindhoven & Co., a privately-owned Dutch company incorporated in 1859. The company was the first to introduce manufactured gas made from coal in Indonesia. After independence, in 1958 the Indonesian government nationalised and took over control of Eindhoven and re-named it Badan Pengambil Alih Perusahaan-Perusahaan Listrik dan Gas. After a series of operational and name changes, the entity was transformed into a limited liability company in 1994, under the name of PGN.

PGN was given the monopoly to develop and distribute natural and manufactured gas domestically. With the introduction of a new oil and gas law in 2001, PGN's monopoly was replaced by a licence to continue its existing distribution and transmission businesses. PGN remained wholly owned by the government until it went public in December 2003. The government has retained 61% in PGN. The management holds 0.6% of PGN and the remaining shares are held by public shareholders.

After abandoning low quality manufactured gas, PGN began to deliver cleaner gas to Cirebon in 1974, followed by other areas, such as Jakarta in 1979, Bogor in 1980, Medan in 1985, Surabaya in 1994 and Palembang in 1996. The total length of pipelines to these areas is about 2,739 km.

By government regulation of 1994, PGN as a national utility had the obligation to have pipelines built for gas transmission and distribution across the archipelago in order to meet demand and develop existing and future consumers, such as households, industries and commercial enterprises. Two key transmission projects have been completed by PGN: Grissik-Duri (536 km, 28") on stream since 1998, and Grissik-Singapore via Batam (470 km, 28") on stream since 2003.

PGN has 59.75% in PT Transportasi Gas Indonesia (Transgasindo), which owns and runs two transmission pipelines from South Sumatra to Central Sumatra and Singapore (the latter transferred from PGN to Transgasindo in 2004). These are part of the Indonesian Integrated Gas Transmission System set by the government.

PGN's competitive position derives from several factors, including its dominance of a growing gas market, a distribution grid with significant capacity for growth and limited additional investment, and a portfolio of development projects. The latter provides a basis for significant growth, a stable utility-like structure and an experienced management team.

To secure adequate natural gas supplies, PGN is participating in expansion of Indonesia's gas transmission system, increasing operations in existing and new distribution markets, and competing with other gas suppliers in new markets. PGN has established strategic business units (SBUs) based on different geographic locations: SBU-I covers the western part of Java, SBU-II covers the eastern part of Java, and SBU-III covers the northern parts of Sumatra. PGN has enhanced the quality of its human resources and its customer satisfaction awareness. Prices of gas supplied to households and small businesses are capped by the regulator SKKMigas. Gas supplies to industries are not subsidised as in the case of oil products sold to industries. PGN will remain free to negotiate and set prices for natural gas sold to industrial customers, who account for 98% of its total revenues.

Gas producing companies can sell their supply obligations directly to local customers, but at rates much lower than international gas prices. Gas producers with PSCs signed after 2001 must supply at least 25% of their output to the local market, which is a disincentive for gas E&P investors. In early 2007 there was talk about raising this obligation to 42% of the output under new PSCs. PGN is rather secretive about its gas pricing formula. Large customers have approached oil and gas companies directly.

Where pipelines are under-utilised, PGN used to have monopoly rights as the distributor and transmitter of gas in the country. But with the introduction of the oil and gas law in 2001, the monopoly ceased to exist and domestic demand for natural gas has since grown rapidly. The government now gives licences to distribute and transmit gas in certain areas. New licences may be granted for an area where there is a lack of pipeline capacity. As long as the existing pipeline capacity is under-utilised, which has been the case with PGN for years, new licences have been given.

There remains a potential for changes to be instituted in the regulatory regime and government policies, which in turn could harm the margins, and hence future operations and profitability of PGN. And growth is constrained by the lack of infrastructure connecting gas reserves with customers. PGN has indicated that it has a long list of customers waiting to be served. Most of its customers are located in Java, while the major gas reserves are located in Sumatra and Kalimantan (see the background in down10IndnsEnrBasMar5-07).

In many cases, PGN collaborates or goes into partnerships with Indonesia's biggest electric power producer, the state-run utility PT PLN (Persero), formerly known as Perusahaan Listrik Negara (PLN). But this power utility is still known as PLN.
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Publication:APS Review Downstream Trends
Geographic Code:9INDO
Date:Mar 4, 2013
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