Presented by:

David J. Braithwaite – President Director PT. Q Energy South East Asia

Shangri-La Hotel, Jakarta

21 June 2012

Gas Development Master Plan Organisational and Regulatory Challenges Consensus Building Workshop

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Overview

• Regulatory developments: recent

• Regulatory developments: likely to occur soon

• Summary of regulatory challenges across gas supply chain

• Organisational complexity

• Examples of how these have constrained gas development

• Conclusions

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Regulatory Developments: Recent

LAW/REGULATION IMPACT ON GAS DEVELOPMENT

Minister EMR Regulation 5 of 2012 Procedure for Determining and Offering Non-Conventional Oil and Gas Work Areas

Positive: provides regulatory certainty for development of shale gas (as well as CBM)

Presidential Instruction 2 of 2012 National Crude Oil Production Increase

Positive: if new incentives given for gas as well as oil

BP Migas annoucement of increase in PSC gas well-head prices 2012 (Migas regulation to follow soon?)

Positive: for upstream Negative: (short-term) for downstream?

Presidential Regulation 61 of 2011 National Action Plan to Reduce GHG Emissions

Negative (for competing with coal): Energy sector only expected to contribute 4.1% of total reduction and gas to contribute 0.4% through CNG for public transport

Govt. Reg No. 79 of 2010 Cost Recovery and Income Tax in Upstream Business Sector

Negative: may discourage future gas exploration as challenges sanctity of the PSC? (IPA’s petition for judicial review to Supreme Court was denied)

Minister EMR Decree 3 of 2010 Priorities for Domestic Gas Utilisation

Positive: provides clarity on how gas to be used but likely to constrain industry growth

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LAW/REGULATION IMPACT ON GAS DEVELOPMENT

Minister EMR Regulation 19 of 2010 Utilisation of Natural Gas as Gas Fuel for Transportation Purposes

Positive: should increase likelihood of infrastructure being built and gas supply being made available

Minister EMR Decree 2010 The Indonesia Gas Balance 2010 - 2025

Positive: as provides data on gas supply and demand by region but how up to date is it: 2011 update not yet released

Minister EMR Decree No 0225 of 2010 Master Plan for National Natural Gas Distribution and Transmission Network 2010 - 2025

Positive: if implemented, but lacks detail on assumptions made for defining pipeline routes and distribution areas

Presidential Instruction No 1 of 2010 Execution of National Development Priorities (including gas infrastructure)

Positive: if implemented includes floating LNG regas terminal in W. Java, N. Sumatra and E. Java

Regulatory Developments: Recent

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Regulatory Developments: Likely to Occur Soon?

LAW/REGULATION IMPACT ON GAS DEVELOPMENT

Revision of 2001 Oil and Gas Law - National Oil Company first right to operate expired PSC’s? - Strengthening the gas DMO?

Negative: creates significant uncertainty

Fiscal incentives to increase oil and gas production (prompted by Presidential Instruction 2 of 2012)

Positive: if incentives extended to gas

New Energy Policy 2011 – 2025 Positive: focus on using gas domestically, though share in energy mix declines to 15% in long term. Energy pricing may include environmental costs.

Acceleration of gas flaring elimination Positive: potentially more gas available for domestic use

#) To follow (reviewing policy still)

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Summary of Regulatory challenges/ Uncertainties Across Gas Supply Chain

Upstream

(Exploration and Production)

Midstream

(Gas Transmission Pipelines/FSRU’s)

Downstream

(Gas Distribution)

- Domestic gas pricing

- PSC extensions

- Cost recovery

- PSC terms for gas in deepwater/remote

areas

- DMO expectation

- Gas flaring elimination

- Permitting

- Land access

- Pipelines: regulated Rate of Return for

transmission and distribution

- Gas Master Plan: process for updating

- FSRU’s:

- Project implementation uncertainty

- LNG supply

- Gas competing with subsidised oil

products/LPG

- Gas supply

- Delineation of distribution areas in Gas

Master Plan

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Organisational Complexity Constraining Gas Development

• Many Government institutions influencing gas development

• Some potential institutional overlap in responsibilities (e.g. upstream gas pricing)

• Institutions may have different priorities

• Some institutions announce new policies and targets but these are not always followed by detailed implementation plans

• Apparent lack of one single institution empowered to decide on and implement a fully integrated gas supply chain development plan

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Key Regulatory Institutions: Gas Supply Chain

UPSTREAM

MIDSTREAM

DOWNSTREAM

MEMR/MIGAS

BPMIGAS

MEMR/MIGAS

BPH MIGAS

MEMR/MIGAS

BPH MIGAS

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Government Institutions Influencing Gas Supply Chain Development

GAS SUPPLY

CHAIN

MEMR/MIGAS

BPH MIGAS

BP MIGAS

BAPPENASNATIONAL

ENERGY COUNCIL

MINISTRY OF PUBLIC WORKS

MINISTRY OF HOME AFFAIRS

MINISTRY OF TRANSPORTATION

MINISTRY OF AGRICULTURE

MINISTRY OF FORESTRY

MINISTRY OF ENVIRONMENT

MINISTRY OF LAW AND HR

MINISTRY OFSOE'S

CHAIRMAN OFNATIONAL LAND BOARD

GOVERNORS

REGENTS/MAYORS

MINISTRY OF FINANCE

COORD MINISTERECONOMY

MINISTRY OF INDUSTRY

Itemised in

Presidential Instruction No. 2 of 2012

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Examples of a Lack of Co-ordination In Government Gas Policy Implementation • In 2012 Minister of State-Owned Enterprises announced that the FSRU

dedicated for the new LNG regas plant in Medan should be re-located to Lampung (and Medan’s gas needs would be met by a pipeline from Aceh), despite the FSRU project being itemised in the 2010 Presidential Instruction “execution of national development priorities”

• Issuance in 2010 of a regulation for widespread use of gas for transportation, but subsidy on premium gasoline and diesel oil remains unchanged

• Announcement in 2010 by Minister EMR: gas distribution pipelines to be built to meet household needs in several cities, but LPG for residential used is still subsidised

• 2011 at PLN Muara Tawar Steam Power Plant in Bekasi (1350 MW), only 7 of the 12 gas turbines were able to use gas, as PGN was not able to supply the full volume committed, as government has in turn allocated 100 mmscfd of this gas to another user (to Chevron’s Duri field in Riau)

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Examples of Pipelines Not Being Built

The following completion dates were set by the Government for gas transmission gas pipeline projects

PROJECT Length (KM)

Capacity (MMSCFD)

Completion

Grissik – W. Java 661 400 2007

Duri – Medan 521 250 2007

E. Kalimantan – C. Java 1,219 1,100 2007/2010

E. Java – W. Java 680 350 2008/2010

To date only the Grissik to West Java pipeline has been completed

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Examples of Gas Demand Not Being Met Due to Lack of Gas Pipelines

• Forum for Nat Gas User Industries has for a long time highlighted the lack of gas for its member companies. For instance ceramics industries could only produce 5 million m2 per day of their 6.5 million m2 capacity, due to lack of gas supply

• A few days ago PLN issued a warning of possible black-outs occuring in Jakarta to a shortage of gas from the newly-commissioned FSRU in Jakarta

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Conclusions Several factors appear contribute to the current lack of the gas supply and gas infrastructure

• Regulations not being fully implemented

• Conflicting energy policies being pursued

• Many institutions can have an impact on gas supply development but no single institution is empowered to have final say on defining and implementing an integrated gas supply chain development plan

• Infrastructure project developers need commitments from both gas suppliers and gas users before proceeding, which to date have been very difficult to secure (and pipeline rates of return are regulated)

• Domestic gas prices are increasing significantly which may attract more gas producers to sell into the domestic market but how will domestic users see the long term competitiveness of gas versus coal in the power sector, and versus subsidised oil products, and LPG in the transport and household sectors?