mitigating disparity between domestic price and lng price

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MITIGATING DISPARITY BETWEEN DOMESTIC GAS PRICE AND LNG PRICE FOR ENERGY SUSTAINABILITY

Presented by:Andika MahardikaSPE- IATMI YP Event Dec 15

Indonesia energy policy put gas as one of priority for domesticmarket. Most of gas production already tied-in for export and coveredwith gas sales agreement. PSC’s rules mention mandatory for DMO around 25%, but gasfor domestic use doesn’t have significant progress becauseeconomical reason Disparity gas price between export and domestic use becamemain reason. Domestic gas price should meet economical reason for allstakeholders and also need to mitigate allocation disparity.2

BACKGROUND

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Root causes identification for disparity between domestic (upstream/downstream) and export markets. Build a strategy to increase the domestic use but still competitive in business perspective Identify government regulations that could be stimulus for domestic gas and identify economical gas price for the domestic market. Brainstorming to increase domestic allocation, especially at new gas field development.

BACKGROUNDOBJECTIVE

INDONESIA’S NATURAL GAS REGULATION

Permen ESDM 03/2010 tentang Alokasi dan Pemanfaatan Gas Bumi untuk PemenuhanKebutuhan Dalam Negeri : Pemanfaatan gas bumi diprioritaskan untuk kebutuhan Dalam Negeri dengan tetap mempertimbangkan

keekonomian pengembangan lapangan. Alokasi pemanfaatan cadangan gas bumi yang baru diketemukan, diprioritaskan untuk memenuhi

kebutuhan setempat. Apabila terdapat kelebihan dapat dimanfaatkan untuk memenuhi kebutuhan wilayahlainnya.

Pemanfaatan gas bumi untuk Dalam Negeri dilakukan dengan mempertimbangkan ketersediaaninfrastruktur, besarnya cadangan dan keekonomian lapangan, dengan urutan prioritas:1.Upaya peningkatan produksi minyak dan gas bumi2.Sebagai bahan baku industri pupuk3.Sebagai penyediaan tenaga listrik dan4.Sebagai bahan bakar/ bahan baku untuk industri lainnya

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INDONESIA’S NATURAL GAS RESERVES

0

20

40

60

80

100

120

140

160

TSCF

Terbukti 108.4 104.7 103.3 101.5 100.3 Potensial 48.7 48.2 47.4 48.9 49.0 Total 157.1 152.9 150.7 150.4 149.3

2010 2011 2012 2013 2014

PAPUA

NATUNA

MALUKU

TERBUKTI = 100,26 TSCFPOTENSIAL = 49,04 TSCFTOTAL = 149,30 TSCF

NAD

SUMATERA UTARA

SUMATERA TENGAH

SUMATERA SELATAN

JAWA TIMURJAWA BARAT SULAWESI

KALIMANTAN

CADANGAN GAS BUMI ( TSCF )

7,51

1,15

7,06

17,90

50,84

3,226,44

13,99

2,5615,21

23,42

NATURAL GAS MAPPINGStatus 01.01.2014

LAST 5 YEARS RESULT

NATURAL GAS VALUE CHAIN

Upstream Midstream Downstream

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TATA KELOLA DAN REGULASI GAS BUMIUUD 1945 Pasal 33

Ayat 1Bumi, air, dan kekayaan alam yang terkandung di dalamnya dikuasai oleh negara dan dipergunakan sebesar-besarnya untuk kemakmuran rakyat.

Ayat 2 Cabang-cabang produksi yang penting bagi negara dan yang menguasai hajat hidup orang banyak dikuasaioleh Negara.UU NO 30 Tahun 2007 tentang Energi

Pasal 3tercapainya kemandirian energi dan tercapainya ketersediaan energi dalam negeri, baik dari sumber di untukpemenuhan kebutuhan energi, bahan baku industri dalam negeri dan peningkatan pendapatan negara.

Pasal 20 (1) penyediaan energi dilakukan diantaranya melalui diversifikasi energi”.

Pasal 20 (2)Penyediaan energi oleh Pemerintah dan/atau pemerintah daerah diutamakan di daerah yang belumberkembang, daerah terpencil, dan daerah perdesaan dengan menggunakan sumber energi setempat,khususnya sumber energi terbarukan.

Pasal 21pemanfaatan energi dilakukan diantaranya dengan mengoptimalkan seluruh potensi sumber daya energi, danmemprioritaskan pemenuhan kebutuhan masyarakat”.

TATA KELOLA DAN REGULASI GAS BUMIUU NO 22 Tahun 2001 tentang Minyak dan Gas Bumi• kegiatan usaha Minyak dan Gas Bumi bertujuan menjamin tersedianya minyak bumi dan gas bumi,sebagai sumber energi maupun sebagai bahan baku untuk kebutuhan dalam negeri.• meningkatkan pendapatan negara untuk memberikan kontribusi yang sebesar-besarnya bagiperekonomian nasional dan mengembangkan serta memperkuat posisi industri dan perdaganganIndonesia.• Pemerintah memberikan prioritas terhadap pemanfaatan Gas Bumi untuk kebutuhan dalam negeri

PP Nomor 35 Tahun 2004 tentang Kegiatan Usaha Hulu MigasKebijakan Pemanfaatan Gas Bumi untuk Kebutuhan Dalam Negeri• Menteri menetapkan kebijakan pemanfaatan Gas Bumi untuk memenuhi kebutuhan dalam negeri denganmempertimbangkan kepentingan umum, kepentingan negara, dan kebijakan energi nasional termasuk didalamnya aspek teknis yang meliputi cadangan dan peluang pasar Gas Bumi, infrastruktur baik yangtersedia maupun yang direncanakan dan usulan dari Badan Pelaksana

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TATA KELOLA DAN REGULASI GAS BUMIPP 55 Tahun 2009 tentang Perubahan PP Nomor 35 Tahun 2014Domestic Market ObligationKontraktor berkewajiban untuk memenuhi kebutuhan minyak dan gas bumi dalam negeri denganmenyerahkan 25% dari produksi minyak dan gas bumiInstruksi Presiden Nomor 2 Tahun 2010 tentang Revitalisasi Industri PupukPenyediaan Gas Bumi untuk Industri Pupuk• Menteri ESDM memprioritaskan alokasi pemenuhan kebutuhan gas bumi untuk bahan baku dan energiindustri pupuk;• Menetapkan harga gas bumi yang dialokasikan dari produksi dalam negeri untuk keperluan industri pupukdidasarkan pada hasil kesepakatan instansi terkait yang dikoordinasikan oleh Menteri Koordinator BidangPerekonomian.

NATURAL GAS INDUSTRIES BUSSINESS MODEL1. Vertical Integration Model, this is traditional model which is production, transportation

and distribution handled by one company. Regulator will be appointing a company to responsible all activities from upstream to downstream.

2. Competition in production segment only, in this model create separation between production and transportation / distribution. In this model will be make competition between operator to develop gas field and make production will be more efficient. Regulator will be appointing another company who will responsible to transport and distribute gas to end user.

3. Open Access to Public Trading, this model opens the access only for public trading. Trading company will be having access to buy gas from service provide which is appointing by regulator and selling the gas to end user.

4. Fully open Access, this model absorbs fully liberation in gas business from upstream to downstream.

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HOW TO DETERMINE GAS PRICE

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“Oil is an internationally traded commodity.. But the isolated regional nature of gas markets, coupled with heavy government intervention in gas pricing, has led to wide variations in pricing practices. There is no world gas price”. Jensen, 2011

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GAS PRICING TYPE

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GAS PRICING MECHANISM

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INDONESIA’S GAS PRICING REGULATION

Note : BP Migas dismissed by MK and temporary replaced by SKK MIGAS

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INDONESIA’S GAS PRICING REGULATION

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COST COMPONENT FOR GAS PRICING

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Financial Aspect

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COST COMPONENT FOR GAS PRICING

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COST COMPONENT FOR GAS PRICINGLNG Financial Aspect (example)

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COST COMPONENT FOR GAS PRICINGPipeline Financial Aspect (example)

No. Name of Project Loan Condition1

Gas Distribution (Jakarta, Bogor, Medan) I = 12 %, grace period = 5 years, loan period = 15 years

2 Gas Distribution (Surabaya) i = 13 %, grace period = 5 years, loan period = 15 years3 Grissik - Duri i = 15 %, grace period = 4 years, loan period = 20 years4 Grissik – Batam - Singapore i = 15 %, grace period = 4 years, loan period = 20 years

5 S.Sumatra - W.Java i = 0.95 % and 0.75%, grace period = 10 years, loan period = 40 years

6W. Java Trans & Distribution Expansion i = %, grace period = years, loan period = years

Toll fee : 2-4 usd/mmbtu

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No Gas Pricing Model Explanation1. Fix Price Commonly used for energy generation sector. This price stay same

during contract. Currently use for term agreement2. Fix price with yearly escalation Commonly used for industry. It will be yerarly correction depends on

oil price, production rate and economic growth3. Gas Pricing with Oil price

correlationCommonly used for upstream transaction and for exploitation process.For example : Gas pricing for LNG to Japan : 0.987x0.154xJCC*+0.34

4. Gas pricing for specific domesticend user

Commonly used for petrochemical & fertilizer product. Formula forgas pricing in fertilizer industries :5.75+0.2(NH3-350)/30+0.3(ureaG-329)/26

5. Combination price betweendomestic end user and oil price

Basically same above explanation. Commonly used for fertilizer andpetrochemical industries but oil price will put on formula:C1x(NH3-25)/155+C2xICP/15+C3x(NH3-225)/32

INDONESIA GAS PRICING MODEL

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INDONESIA GAS PRICING MODEL (CONTD)

Prices of Indonesia’s LNG exports to Japan, S. Korea andTaiwan can be calculated using the 1973 formulae:where: n = YearPn = ICP-Indonesian Crude Price @ Year n Po = ICP-Indonesian Crude Price @ 1973 = US$ 6,0/barrel

nnLNG Po

PnP )03,1(1,09,0)(

Sumber: Hananto Nugroho, LNG contract and Pricing , Bappenas

MITIGATING GAS ALLOCATION DISPARITY

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1.Supply Priority versus Demand

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• Indonesia gas production fluctuate from mature field such as ONWJ and Natuna field. However, demand still increase in domestic market

• Indonesia positive economic growth increasing demand rapidly especially for electricity

• Regulator should be make supply priority to domestic energy sector especially in new develop gas field like Masela and Donggi Senoro

• Regulator should be push PSC’s Company to allocate any excess gas production to domestic market. Pertamina EP already allocated nearly 100 % to domestic market

INDONESIA GAS ALLOCATION 2014

1.Supply Priority versus Demand

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1.Supply Priority versus Demand (Contd)

Projected PLN Jawa Bali Demand Versus Gas Supply

2.LNG Infrastructure

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• As Island country Indonesia with fast-risingdemand and limited interconnections betweencountries. Indonesia need to speed up installationof several LNG regasification terminals,especially for East Area

• Distance between gas production region tocenter of demand region makes Indonesia relieson a good infrastructure

• Converting “idle” LNG Plant to RegasificationPlant .

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3. Pipeline – Gas Hub Connection

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1. The Indonesian natural gas pipeline network is comprised of a number of fragmented point-to-point grid systems.2. There are three main transmission system operators (TSO) in the country: two state-own companies - PGN and Pertagas - as well as a private transmission company, Trans Gas Indonesia (TGI).3. Need to have Pipeline Gas Hub System

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MITIGATING GAS PRICE DISPARITY

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1.Acceleration Law Revision 22 of 2001 on Oil and Gas

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After judicial review by MK. Its need to accelerate revision of oil/gas law consisting:• Completion of Institutional aspects : required one government

body who responsible for managing upstream oil and gas business as well as inter-agency coordination. It’s can be form as BUMN , BHMN or ESDM itself

• Integration of upstream and downstream sector

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MITIGATING GAS PRICING DISPARITY

2.Domestic Pricing Policy by Government• Renegotiation for export allocation in existing contract. Since limited supply to domestic market• Production, transportation, distribution cost

transparency. Gas pricing on domestic market can’t be relies in market price

• Government should be active in consumer selection and pricing negotiation especially for DMO allocation also government’s production sharing

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3.Fiscal Policy for Domestic Market Allocation

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• Increasing production sharing for PSCCompany. This step need to take forattracting PSC company develop gas fieldfor domestic market• Domestic gas price subsidized scenario, itcan be done for energy sustainability andpublic needs

1.Supply Priority versus Demand2.LNG Infrastructure3.Pipeline – Gas Hub Connection4.Acceleration Law Revision 22 of 2001 on Oil and Gas5.Domestic Pricing Policy by Government6.Fiscal Policy for Domestic Market Allocation34

SUMMARY

Steps to mitigate price disparity is confirming availability gasallocation to domestic market by following step below:

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Mitigating Disparity Between Domestic Gas Price and LNG Price for Domestic Energy SustainabilityPresented to SPE Young Professional-Java Section and IATMI Young ProfessionalBy:JUMADIS ABDA

Jakarta ; 17 December 2015

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Background Natural Gas as primary energy is still cheap energy and still alot of reserves in Indonesia. If used to produce electricity, Natural Gas has many advantages to drive power generation. Environment friendly. So that proper to use in many sectors and beable to strong foundation of Indonesia’s

economic.

Oil and Gas ReservesJanuari 2014

Source : SKK Migas Annual Report

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The Advantages to Power Plant Budget for investation is cheaper. Faster to build power station, only 2 years. High reliability in operation. Need smaller land to build power station. Be able to operated as base load and peak load. The most efficient in operation (Heat Rate is the most lowest). Etc.

Impact to PLN ; Problems of Natural Gas In Electrical Company (PLN) Nowaday Expensive PLN Price about US $ 10/MMBTU

But :- LNG Price to Japan about US $ 6/MMBTU, - WTI (NYMEX) about US $ 2/MMBTU- TNB Price about RM 15,2/MMBTU or US $ 3.5/MMBTU

Lack of suply of Natural Gas- PLN still use alot of fuel oil to generate electricity about10%.

But : TNB and EGAT only about 2%. The Electricity’s price become more expensive too, so that the economic growth of Indonesia would be decline.

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Energy Mix of PLN : 2008 - 2014

Energy Mix of PLNGas 28,13% ; Fuel Oil 15,08% (2014)

FY 2013

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Energy Mix of TNB (PLN Malaysia)

Source; TNB Annual Report 2013

Gas 51% (2014)

And from EGAT (PLN Thailand)(2014) Natural Gas : 66,91% Fuel Oil : 1,07%

Source; EGAT Annual Report 2014

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Subsidies from government to PLN 2005 - 2015Rp. Triliun

Or : Electricity rates increased so that it becomes more expensive. And it makes Indonesia’s economic in difficulty condition.

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Impact to Indonesia’s Economic Deficit of budjet in energy of export – import:

Export the cheap energy and import the expensive energy.> Export natural gas; 6x3,500,000x365 = 7,665 Million> Import fuel oil ; 9x3,500,000x365 =11,497.5 Millionso the deficit become ; US $ 3,632.5 Million/Year

Currency converter IDR to US $ would be decline. High cost economic would be happen. Industries don’t have capability to compete with abroad. No new job area in Indonesia (jobless).

Crude Oil Price History

Source: wtrg.com

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Natural Gas Price History

Source: wtrg.com

Comparison of Natural Gas Price to Crude Oil Price (13 Dec 2015) Crude Oil US $ 36/barel = 36/159

= US $ 0,226/Literor ; 0,226 x 25 = US $ 5.66/MMBTU

Natural Gas US $ 1.77/MMBTU So that C.O Price compare to N.G Price :

5.66 : 1.77 = 3.2 : 1 (Natural Gas is the cheapest)

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Jokowi-JK in Energy Sector before Election

Source: Jokowi-JK Team Energy



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How to solve (Mitigating Disparity) for PLN Change the mindset of the energy manager in government of Indonesia Change the scheme of natural gas price for domestic. Build infrastructure of gas like gas pipe so that the natural gas price is delivered with low cost (natural gas price become cheaper than LNG).

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Change the mindset of the energy manager of Indonesia Back to Basic Regulation of Indonesia (Constitution UUD 1945, article 33 clause 2 and 3), Need to educate energy manager of goverment so that they know that natural gas would be exported constitute disadvantages for Indonesia. The export should be limited and controlled by goverment, maximum the same as law of UU 22/2001. Max 25% x percent of portion to PSC to domestic. Encourage to goverment always remember and consistency for their promises before the election to priority of cheap energy (natural gas) for Indonesia’s

community.

Change the scheme of natural gas price for domestic Evaluation of natural gas price in upstream based on ROI and added some percent of benefit, to assure domestic energy sustainability and security of supply to support Indonesia economic so that be able to compete with the other country. Price of natural gas based on export/ international price but a little bit lower. The scheme can be carried out with crude oil price as reference.

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Build gas pipes as Infrastructure Build gas pipe as cheaper infrastructure to hold down of natural gas price significantly, mainly in down stream cost. It will be better built by goverment. Recommended to these are (very urgent):- Gas pipe from IDD Makassar Strait (1000 MMSCFD) toKalimantan and Jawa.- Gas pipe from Masela (1200 MMSCFD) to NTT, NTB,Maluku, Bali and Jawa. To replace Floating LNG Terminal

in the sea by upstream cost with cost recovery.- Gas pipe from Mahakam Block after 2017?.

THANK YOU verY mUcH FOr YOUr ATTeNTIONS

mitigating disparity between domestic price and lng price

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