No higher prices, no additional supply

Posted on May 1, 2012

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Rangga D. Fadillah, The Jakarta Post, Jakarta | Sat, 04/21/2012 9:42 PM

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Following the success of several gas-sale contract renegotiations, the government now has the momentum to encourage natural gas producers in the country to allocate more for domestic buyers.

Unappealing prices have long been blamed as the main reason why gas producers are reluctant to sell to the domestic market.

The problem is a cliché. The government has historically faced a dilemma as to whether or not it should raise gas prices for domestic buyers as to do so may hamper the competitiveness of gas-reliant industries.

But now, even when most industries have made it clear that they are willing to buy gas at economic prices, as long as they receive sufficient and sustainable supplies, the government has still not revealed any firm decision on more supplies for this year.

Commenting on the situation, upstream oil and gas regulator BPMigas deputy for operations, Rudi Rubiandini, argues that the reluctance by state gas distributor PT PGN to pay higher prices to producers is the core of the problem.

“Industries say BPMigas refuses to supply more gas to them, but after studying the complaints, I find that the problem lies with PGN for its limited infrastructure and the too-low prices it pays to gas producers,” he explained.

Under some contracts, PGN still bought gas at a price below US$4 per million British thermal units (mmbtu), such as a 441.7 billion British thermal units (Btu) per day gas supply from the Corridor block in South Sumatra, which was operated by US-based ConocoPhillips, Rudi revealed.

The supply from the block is covered by two agreements, comprising a 373.5 billion Btu per day supply to West Java at a price of $1.85 per million Btu and a 68.2 billion Btu per day supply to Batam for a price of $2.4 per million Btu. Both agreements began in 2008 and are due to end in 2017.

On Wednesday last week, BPMigas announced that it had successfully renegotiated the price for gas sent to Duyong in Malaysia from Natuna Block B, operated by US-based ConocoPhillips, from $3.1 per million Btu to $6. A formal agreement with the buyer, Petronas, will be signed in the near future after the new price is approved by the Energy and Mineral Resources Ministry.

BPMigas is currently facilitating many other renegotiations for gas contracts whose prices are still below $5 per mmbtu, including PGN’s, in a bid to make gas producers more eager to develop their field and invest more in finding new gas reserves.

PGN has repeatedly said that it cannot directly agree to renegotiate its buying prices since that would influence prices its customers have to pay for the gas.

Heri Yusup, the company’s corporate secretary, argued that his company could not accept paying higher prices to gas producers. If PGN were forced to pay higher prices, he added, producers could add supplies to ensure their own security.

“We have met informally several times with BPMigas but until now, for some contracts, deals have not been made and talks are still underway,” he said.

In addition to the contract for supplies from the Corridor block, there is a renegotiation with Pertamina EP for the supply of 110 billion Btu per day from Pagar Dewa in South Sumatra. The current purchase price is set at only $2.2 per mmbtu.

“Other than the Corridor and Pagar Dewa, there are some contract renegotiations that have not been finished, but the gas volumes aren’t significant,” said Heri.

PGN operates more than 5,800 kilometers of transmission and distribution pipeline networks across Indonesia. The company dominates around 90 percent of the gas infrastructure in the country.

Difficulties faced by domestic gas users in obtaining sufficient supplies have increased the pressure on the government to reduce gas exports and allocate more toward the domestic market.

According to the Forum for Natural Gas-Using Industries (FIPGB), industries only received 567 billion Btu per day of gas or 65.3 percent of the 868 billion Btu per day promised by the government.

Therefore, many are demanding that the government implement the domestic market obligation (DMO) ruling — where a gas producer has to sell at least 25 percent of its gas share to the domestic market — to all gas producers because currently, some of them export 100 percent of their gas.

BPMigas official data showed that according to the 2011 natural gas supply contract, 4,366 billion Btu per day, or 56.78 percent, of the total sales of 7,688 billion Btu per day would go to the domestic market with the remaining 43.22 percent, about 3,322 billion Btu per day, for exports.

In 2010, the gas sold in the domestic market totaled 4,342.7 billion Btu per day or 50.18 percent of total sales, which reached 8,654.29 billion Btu per day.

An energy expert from the University of Indonesia, Kurtubi, urged the government to be more firm in forcing gas producers to allocate 25 percent of their gas supplies for domestic buyers. The producers could only export gas when the domestic demand had been fully met.

“The energy and mineral resources minister has the power to force gas producers to sell to the domestic market, because it’s mandated by law [the 2001 Oil and Gas Law],” Kurtubi told The Jakarta Post.

However, he added that the government could add supplies for domestic buyers only if sufficient infrastructure to transport and store the gas was available, particularly to utilize liquefied natural gas (LNG), all of which was currently exported.

In 2011, Indonesia produced 362 cargoes of LNG from three LNG plants (Arun, Bontang and Tangguh). Japan was the largest importer of Indonesia’s LNG, purchasing 172 cargoes, followed by Korea with 68 cargoes, the US with 55 cargoes, China with 35 cargoes and Taiwan with 32 cargoes.

This year, the country’s first floating storage and regasification unit (FSRU) with a capacity of 3 million tons per annum (mtpa), equal to 400 bbtud, is expected to begin commercial operations in August, delayed from April as previously projected. The terminal will receive 1.5 mtpa of LNG from the Bontang plant in East Kalimantan, which will lead to exports from the plant being reduced.

Posted in: Energi