international journal advances in social science and

ISSN: 2347-7474

International Journal Advances in Social Science and Humanities Available online at: www.ijassh.com

RESEARCH ARTICLE

Tjendrasa, Kinsenary | July. 2014 | Vol.2 | Issue 7|44-53 44

Economic Advantages of Utilizing Natural Gas for Indonesian Domestic

Fuels in Lieu of Fossil Liquids and Coals

Tjendrasa, Kinsenary (Kin)* DMB - Universitas Padjajaran, Bandung, Indonesia.

*Corresponding Author:Email:[email protected]

Abstract

This paper explores the economic advantages of utilizing natural gas and incentives to switch in different

forms such as pipe gas or CNG (Compressed Natural gas) for domestic consumptions in Indonesia to

replace diesel, kerosene, gasoline and coal. The 2011 data indicates that the domestic demand on energy

was circa 3 MMBOEPD (million barrels oil equivalent) with refined crude oil supplying half of the

demand. More than half of 950 MBOPD crude oil was imported as Indonesian government entitlement

from PSC production is circa 60% of production at under Production Sharing Contract (PSC). With 6%

annual national growth rate, the demand will be 4 MMBOEPD by 2015. Indonesia has much small to

medium size gas reserves scatter around major Indonesian islands that can be commercialized if the

financial reward is right. Among the constraints are the economic returns that investors of which the

consumers and Government of Indonesia can benefit from, the assurance of continuous supply and

acceptance of long term benefit on conversion to gas in economics and environmental protection. The key

success factors are energy pricing policy, incentive to use clean energy and firm enabling regulation for

quick monetization and assurance on investment. Indonesia has proved and probable (2P) gas reserves of

237 TCF can be tapped for commercialization. Indonesia also has 21 billion tons of coal reserves that can

be exported to earn foreign reserves. Lacking of gas infrastructure increases the complication of gas

utilizations. The investors need to get the risked economic return on their investments; they may have

invested to where they get higher rewards in other countries as money has no ”border”. The missing link

is the competitive commercial prices, supporting infrastructures, consumers’ willingness and incentive to

shift using natural gas.

Keywords: Natural gas, Domestic consumptions, Energy pricing policy, Enabling regulations, Risked economic

return.

Introduction

Indonesia’s oil and gas industry has been initiated

since 1885, and is recognized as the third oldest in

the world after the United States and Russia. The

first discovery of oil in commercial quantities

occurred in 1885 in North Sumatra; the main oil

producing fields in Central Sumatra were not

discovered until the 1930s and 1940s. Following

its independence in 1945, Indonesia sought to

realize the potential that the oil and gas industry

possessed for providing the funds necessary for

the development of the country and its

infrastructure. The application of PSC

(Production Sharing Contract) resulted many

significant oil discoveries above 100 million

barrels of oil in 1968/1972 from Offshore North

West Java’s Ardjuna field and South East

Sumatra’s Cinta field. In late 1971, a major gas

discovery was made in the Arun field in northern

Sumatra by Mobil Oil Indonesia Inc., followed by

Huffco Indonesia in the Badak field in East

Kalimantan in early 1972. These two independent

discoveries established Indonesia as a major

exporter of LNG (liquefied Natural Gas) with the

shipment of its first LNG cargo taking place in

August 1977 to Japan. Since then, Indonesia has

become the largest exporter of LNG in the world

according to the Indonesian US Embassy’s

Petroleum Indonesia Report.

A Glance on Indonesian Upstream Oil and

Gas Industry

Available online at: www.ijassh.com


Fig. 1: Map of Indonesia with Gas Infrastructures (Source of map: BPH Migas)

Indonesia, officially the Republic of Indonesia, is the largest archipelago country located in Southeast Asia along the equator line that covers

1,811,569 km2 land comprising over 17,500 islands over 5200 KM from Sabang to Merauke. It has 33 provinces with over 238 million people,

and is the world's fourth most populous country. The population is mostly concentrated in western part of Indonesia, mainly Java, Bali and

Sumatra. Indonesia shares land borders with Papua New Guinea, East Timor, and Malaysia. Other neighboring countries are Singapore,

Philippines, Australia, and the Indian territory of the Andaman and Nicobar Islands. Figure 1 is the map of Indonesia, also indicates the location

of major natural gas facilities and its infrastructure.

Currently, over 200 contracts are in place with

independent operators, including over 130 PSCs,

for the exploration, development and production

of oil and gas reserves. In 2005, Indonesia

struggled to maintain oil self-sufficiency and the

Government is continuously seeking to incentivize

investment in the oil and gas industry. Having

been a mainstay of the economy for many decades

since the first discovery of oil in 1885, Indonesia’s

oil and gas sector is perceived as in a state of

decline. Having become a net importer of oil in

2004 and relinquishing OPEC (Organization of

Petroleum Exporting Countries) membership in

2008, oil production figures have continued to

decrease from their high above 1.6 MMBOPD

(Million Barrel Oil per Day) in 1997.

Since the Asian Crisis of 1998, investment in

exploration of new fields has dwindled and the

sector shrank by 3.61% in 2010 according to the

Central Statistics Agency. Per 2011 data, the

country has 4.0 BBO (Billion Barrel of Oil) and

188 TCF (Trillion Cubic Feet) of oil and gas

Proved reserves according to BP’s 2012 World

Energy Statistical Data, respectively, but

substantial investment is required to access them

and fund the necessary exploratory infrastructure.

In addition, Indonesia also has 3.5 BBO and 49

TCF of Probable oil and gas reserves, respectively

(Source: Directorate General of Oil and Gas). It is

important to recognize that many technically

discovered reserves were not booked due to its

lack of commercial values, especially marginal gas

discovery. In addition, Indonesia has 21.1 Billion

tons of Coal reserves with total coal resources of

105 billion ton. In 2011, Indonesia produced

290,000 ton of coals, exported 209,000 tons and

domestic use of 65,000 ton (source of data:

Direktorat Jendral Mineral dan Batubara).

Structure of Oil and gas Management in

Indonesia

Fig. 2:BP Migas (Badan Pelaksana kegiatan usagha hulu Minyak dan Gas Bumi)

http://en.wikipedia.org/wiki/Southeast_Asia

http://en.wikipedia.org/wiki/List_of_islands_of_Indonesia



Above chart describes how the Indonesian government managed oil and gas under existing law no. 22/2001. Law No. 22/2001 which governs the

activities of the oil and gas sector in Indonesia states that BP Migas is formed to be the regulatory body for upstream activities in oil and gas

such as exploration and exploitation through PSC between BP Migas and the company involved in PSC which may be state owned, branch of a

foreign company or private local company. The body has emphasized more on controlling rather than managing the growth of Indonesian oil and

gas businesses.

BPH Migas (Badan Pengatur Hilir Minyak dan Gas Bumi) BPH Migas covers the downstream sector such as processing, transport and storage.

Foreign companies with a representative office in the country may engage in both upstream or downstream but cannot be involved in both areas

in one single legal entity. The law also states the preference for use of local manpower and expertise in execution of projects as well as

environmental standards that must be met by companies.

Fig. 3:Indonesia Oil Demand Growth Amid Decreasing Production

Fig. 4: Sources: IPA Convention, May 2012

The oil and gas sector has played important roles in Indonesia's economy, accounting for 7% of Indonesia's GDP, directly over 25% of state

revenues and US$16 Billion of direct investment annually. In addition, she added that declining oil production from 1.6 MMBPD in 1996 to about

942 MBPD (Thousand of Barrel Oil per Day) in 2011 reflects the maturity of existing fields and the lack of new developments, emphasizing that

Indonesia needs to unlock new resources and realize the potential of gas reserves, together with further development of sustainable renewable

energy resources.

In current Indonesian government income, the

revenue from oil and gas play a very important

role contributing 22% to state expenditure in 2012

estimate. In 2011, oil and gas contributed 35

billion US $ to Government of Indonesia. On oil

production, Indonesian oil production in 2011 was

942 MBOPD while the consumption was 1430

MBOPD. Indonesia has been net oil importer

since 2004.

Overview of Indonesian Natural Gas

Sector

Indonesia with proved gas reserves of

approximately 188 tcf is the twelfth largest holder

of gas reserves in the world. Indonesia ranks

Fig. 5: Indonesian natural gas production &

domestic consumptions Source: BP Migas presentation in May 2012 IPA convention

ninth in world gas production. Indonesia produced

approximately 7.3 bcf/d of natural gas in 2011,

about half of which was consumed domestically.



Several fields are expected to come on stream in

2013 and will boost production. Indonesia exports

gas to Malaysia and Singapore via pipeline.

Indonesia is also the world’s third largest LNG

exporter with LNG plants at Arun, Bontang and

Papua’s Tangguh.

The GoI (Government of Indonesia) requires gas

producers with a PSC signed after 23 November

2001 to supply 25 per cent of their gas production

to the domestic market. However, this domestic

obligation has failed to keep pace with growing

domestic demand for gas from both the power and

fertilizer industries, left alone for motor vehicles

which consume most of the gasoline and diesel

Indonesia partially imports to fulfill domestic

demand. As a result the GoI introduced a policy to

redirect gas intended for export to domestic

projects. To this end, gas has been diverted from

the Bontang and Arun LNG projects. Recently the

GoI has stated that producers will be allowed to

export gas provided there are no domestic buyers.

The Ministry of Energy & Mineral Resources

(MEMR) claims domestic customers will be given

the first opportunity to negotiate the purchase of

gas.

The opportunity of CBM (Coal bed methane)

which starts in 2007, offers huge potential to

Indonesia given that it holds the world’s second

largest reserves, estimated to be 453 tcf. As yet

there is no commercial production of CBM in

Indonesia. The first CBM cooperation contracts

were awarded in 2008 and a further four are

expected to be auctioned in mid 2010.

As demonstrated in the graph (figure 4) above, in

2011, Indonesia’s gas consumption was about ½ of

the 7.3 BSCFD (Billion Standard Cubic Feet per

Day) productions. The fertilizer, petrochemical

and power generation are the principal domestic

consumers of natural gas in Indonesia. However,

Indonesia’s limited natural gas transmission and

distribution network remains an obstacle to

further domestic consumption. Historically,

natural gas transmission and distribution

activities are carried out by the State-owned

utility PGN (P.T. Perusahaan gas Negara,

(Persero), Tbk), subsequently, PGN has

transformed into a public listed company. The

Government announced a “Master plan” in 2006

for the development of a natural gas transmission

and distribution network and subsequently,

following a public tender process, the downstream

regulator, BPH Migas, awarded concessions

(“Special Rights”) to construct and operate a

Trans Java and a Kalimantan to Java pipeline to

non-PGN consortia. The implementation of the

master plan is very slow, if not idle.

At international (regional) connections, Indonesia

began exporting natural gas via pipeline in 2001,

with the opening of the 400-mile, 325-million

standard cubic feet per day (MMscf/d) subsea

pipeline from West Natuna to Singapore. In

August 2002, Indonesia began delivering 250

MMscf/d of piped natural gas to Malaysia’s

Duyong platform. And in August 2003, a second

natural gas connection to Singapore was opened

when the South Sumatra-Singapore pipeline was

completed. This line reached 350-MMscf/d

maximum capacity during 2006 and will deliver

natural gas to Singapore over a 20-year contract.

Indonesia has played a leading role in discussions

of the proposed “Trans-ASEAN Gas Pipeline”

(TAGP), which envisions the establishment of a

transnational pipeline network linking the major

natural gas producers and consumers in

Southeast Asia. The TAGP concept was initially

proposed in 1997 as part of ASEAN’s “Vision

2020” initiative. In July 2002, energy ministers

from the ASEAN countries signed a memorandum

of understanding to study the viability of the

project, although much work remains to be

completed to fully realize the project’s goals (for

more information, see ASEAN’s Plan of Action for

Energy Cooperation, 2004-2009).

Indonesia is a leading LNG (Liquefied Natural

Gas) exporter. Indonesia was the world’s largest

exporter of LNG in 2005, although some reports

suggest that the country was surpassed by Qatar

sometime in 2006. During 2005, Indonesia

exported 23 million tons (MMt, or 1,123 Bcf) of

LNG, or about 16 percent of the world total.

Indonesia produces LNG from three terminals:

the Bontang facility in Badak, East Kalimantan,

the Arun plant in North Sumatra and the

Tangguh LNG plant in West Papua.

Domestic Gas Distributions and

Utilization

PGN operates more than 3,100 miles of natural

gas distribution and transmission lines, (see

figure 1) comprising nine regional networks. The

networks have limited interconnectivity, which

has restrained further growth of domestic natural

gas consumption. PGN has plans to build four

additional domestic natural gas pipelines to

improve the country’s natural gas network

connectivity, known as the Integrated Gas

Transportation System (IGTS). The IGTS is

designed to eventually link the islands of Sumatra,

Java, and Kalimantan via a 2,600-mile pipeline.

The World Bank, Asian Development Bank, and

/bontang-lng-terminal

/arun-lng-terminal

/tangguh-lng-terminal



PGN are jointly financing the project. So far, the

planned interconnection is partially complete, and

is scheduled to be fully operational in 2010 with a

capacity to transport 2.2 Bcf/d of natural gas. In

addition, Pertamina (PT Pertamina (Persero) has

some pipeline network in West and East Java and

East Kalimantan for Industrial estates.

Industry85,729 38%

Power plant62,857 28%

Own uses / losses39,943 18%

Non-energy / other

28,382 13%

Refinery / other6,805 3%

Household / commercial / transportation

1,168 0%

Fig. 6a: Use of natural gas in Indonesia – 2010 (MMBOE)

Transportation227,203

57%

Power plant63,611 16%

Industry57,602 15%

Non-energy / other

28,743 7%

Household / commercial

21,466 5%

Own uses / losses

628 0%

Fig. 6b: Use of fuel in Indonesia – 2010 (MMBOE)

Source: 2011 Handbook of Energy & Economic Statistics of Indonesia

The gas industry in Indonesia may look rosy,

however, Indonesia is lacking of domestic and

regional gas transmission to enable quick

transportation of gas to consumer area. Observing

the data, the gas utilization for domestic land

transportation such as motor vehicles is at most,

1 % of the production (Figure 6a). This

phenomena is an interesting anomaly and good

research topic, we need to find out the hidden

reasons behind. Natural gas is deemed

environmental friendly; relatively lower price

compared to crude oil or coal liquid; many

countries import natural gas for their motor

vehicles, power generation uses; many

government give incentive for converting liquid

fuel to gas, and Indonesia has not done so, or at

most, at the pilot phase for many years and

moving nowhere.

On the other hand, the domestic liquid fuel

consumptions with heavy subsidy are continuous

and can hardly see any good effort to reduce and

ultimately, eliminate this subsidy and use the

money for better people development to build a

prosperous society where people can make enough

income to support their living and more. Even

recently, the utilization of natural gas for PLN

(Perushaan Listrik Negara, the national

electricity (power) company) increases

substantially, much need to be done to ship the

gas to remote area in lieu of using diesel or coal.

Motor Vehicle Fuel Subsidy and CNG

From Indonesian Ministry of Finance report,in

2012 fiscal budget, Indonesian government has

targeted a 208.9 trillion rupiah, or at IDR of

9,500/ US$, is approximatrely US$.22 billion. In

deed, the budget was insufficient, and revised

budget for additional subsidy was recently

granted . That is the results of using 40 million

kilo liter of fuel at subsidized price, comprised of

24.4 million kilo liter for Primium gasoline 13.9

million kilo lter of diesel and 1.7 million kilo liter

of kerosine. The low consumption in Kerosine for

home cooking was the result of conversion to LPG

(Liquefied Petroleum gas) in 2008. The

consumptions of Kerosine in 2007 was 9.9 million

kilo liter. The conversion to LPG due to its clean

and easy to transport in nature has reduced as

much as 9 million kilo liter of Kerosine

consumption.

Composition of Subsidized Fuel

Consumptions There is one opportunity in which government of

Indonesia can intensify the conversion, which is

using CNG for motor vehicle to replace Premium

gasoline. In August 2012, Premium gasoline

consumption in Jakarta topped 1.41 million

kiloliters, 37.4 percent more than the government's

allocation of 1.03 million kiloliters for the month,

according to state energy firm PT Pertamina. The

subsidised Premium gasoline is sold at 4,500/l at

pmp. IN the $100 /BBL crude oil FOB (free on board)

price , Pertamina has reckoned that the full cost

breakeven price is circa 8,000 / liter, or Indonesia

government is subsiding 56% of fuel cost. Imagined

for 1.41 kilo liter at IDR 3,500/leter, that was a

sudidy of IDR 4.9 tillion or US$519 million. If

governemnt can use natural gas through an

intensive development program with higher

incentive to oil and gas players, the subsidy can be

elimated. The way is to convert the Premium

gasoline users (four wheel car to start with) to use

CNG, compressed natural gas.

Currently, the usage of natural gas is only focus on

Power plant or industrial feedstock or power

generation; encouragement of applicaion in small but

massive scale such as home cooking; CNG for motor

vehicle; for small electricity generation



Fig. 7: Fiscal policy office, ministry of finance Source: IPA May 2012 Convention

have not been established, or at most, is at “pilot”

phase. On the other hand, There are many small

sub economic natural gas scattereed among the

PSC area in Indonesia. The main reason for

subeconomic is that, theere is has no defined

market mechanism for natural gas on domestic

market, the selling price is negotiated as economic

price, making each gas sale through a lengthly

negotiation between customers, government and

producer. If government can encourage domestic

gas sale as in crude oil, using x percentage of

crude oil price parity as in Bontang LNG formula,

this can shorten the commercialization of natural

gas in much shorter time. The other main reason

for subeconomic is due to tough fiscal term as

compared to US or UK tax system or royalty and

tax system. In deed, the calculation in table 1

below demonstrated that the government does not

have to alter current PSC terms, but lower the

government split from 70/30 to 50/50 profit share,

and enable the quicker development and provide

one off subsidy to consumers in term of Premium

gasoline to CNG conversion kit,say free of charge.

The kit can easily be financed from the

government take from the sale of natural gas in

the form of CNG.

Gas Economics for Marginal Field

In exploration activities in Sumatra, Kalimantan,

as well as in Java, there are many technically

proved gas discovered in smaller accumulation at

0.5 – 3 BCF (billion cubic feet) of which they were

deemed non economics with current market prices

(3-6$/MCF) and fiscal terms. If the gas price can

be liberated to equal to 90% of crude price

(assumed current market of $90/BBL) in similar

heating value using Bontang LNG price formula,

we can expect that PSC contractor can make

money and willing to invest by taking higher

exploration risk, provided that the government

can also shorten the development approval timing

to enable commercial sales in 24 months from

exploration success to first gas. To do this, there

will need major de-bureaucratize on current

approval and tendering procedures, including

regional government complicated permit and fee.

The economic evaluation demonstrated that, even

with a natural gas discovery, as low as 1 BCF, can

be economics and to be used as CNG in the area

where the gas discovered (within 200 km radius)

if the road infrastructure is available. Calculation

below has not considered other elements as time

value money (NPV, Net Present Value), IRR

(internal rate of return) or WACC, (Weighted

Average Cost of Capital).

With this incentives, the less capital intensive

investors have higher freedom and lower

commercial risks to fully focus on exploration

risks and has better EMV (expected mean values)

in petroleum risked economic determination even

though the discovered gas may be deemed sub-

economic for super major oil and gas companies

with high front end capital. The incenbtive will

even be more economically attractive if the

contractor is also to charge the cost of fund

(interest of borrowing) as part of the operating

cost. Given that most Indonesian enterprise pay a

LIBOR plus 10 to finance an oil and gas project on

recourse basis.For non recourse financing, the

cost of fund will be circa 20% higher. Further, to

attract investor interest, for CNG development,

Indonesian government can offer 50/50 split in

addition to allow interst as cost recovery, the will

surely improve the investment climate and

encourage the usage of CNG.



Table1: Natural gas economics,marginal discovery

Natural gas Economics, Marginal DiscoveryMARGINAL GAS ECONOMICS 70/30split

Marginal Gas Field Unit 1 2 3 4 Reamrks

Gas Volume MMSCF 500 1000 2000 3000produced in 3 years; 900

MCF /day

Gas Price $/MCF 13.5 13.5 13.5 13.5assumed $90/BBL crude at

90%

Gross Revenue$ $, K 6750 13500 27000 40500 90

Exploration Cost $, K 3000 3000 3000 3000Seismic + Drilling; 1 well

~4000 feet

Facilities $, K 2000 2000 2000 2000tie-in to the exploration

success well

Production Cost $, K 3000 3000 3000 3000

Profit before tax $, K -1250 5500 19000 32500

Gov Take, Profit + Tax $, K -875 3850 13300 22750Simplified calculation,

70/30 split

Contractor Profit $, K -375 1650 5700 9750

VOLUME BOE 83,333 166,667 333,333 500,000

Gas Sale in 3 years MCF/day 457 913 1,826 2,740

Gas Sale in 3 years KL/D 12.10 24.20 48.39 72.59 Kilo Liter / day

MARGINAL GAS ECONOMICS 50/50 split

Marginal Gas Field Unit 1 2 3 4 Reamrks

Gas Volume MMSCF 500 1000 2000 3000produced in 3 years; 900

MCF /day

Gas Price $/MCF 10 10 10 10assumed $90/BBL crude at

90%

Gross Revenue$ $, K 5000 10000 20000 30000 90

Exploration Cost $, K 3000 3000 3000 3000Seismic + Drilling; 1 well

~4000 feet

Facilities $, K 2000 2000 2000 2000tie-in to the exploration

success well

Production Cost $, K 3000 3000 3000 3000

Profit before tax $, K -3000 2000 12000 22000

Gov Take, Profit + Tax $, K -1500 1000 6000 11000Simplified calculation,

50/50split

Contractor Profit $, K -1500 1000 6000 11000

ScenarioTable 1- A 70/30

Table 1 B-50/50 Scenario

It has not been a secret in oil and gas industry in

Indonesia, a discovery of oil may take at least 36

months to 60 months to put on first commercial

and the gas discovery can be as long as 5 to 10

years. BP Tangguh gas was discovered in 1994

and put on production in 2008. Inpex Masela gas

field was discovered in 2004 and current plan is to

have fisrt commercial gas by 2018. Both are LNG

project as the gas is in West paupua offshore and

Arafura sea of Maluku. This kind od major

discovery will need strong capital back up to

spend the money without income for 10 plus years.

CNG in Lieu of Premium Gasoline and

Coal

Indonesia has very limited use of natural gas for

motor vehicles. And home cooking. Observing

that Indonesia has almost no CNG car, except for

a few taxi in Jakarta. CNG is natural gas

compressed for the purpose of simplified transport

and storage. Bulk CNG transport technology is

not new, it is well-proven -CNG has been

successfully transported on land by road-trailer

(trucking) for over thirty years. The up-scaled

application of proven CNG technology to a marine

(shipping) transport system is new. A bulk CNG

road delivery system is considered best suited for

short range projects, normally under 200km one-

way, with continuous end unloading supply and

low storage requirements. A CNG project system

is normally designed around the main criteria of

annual and daily volume of NG required and

route distance.

For storage and transporting, natural gas is

compressed into special tanks, gas containment

tanks (GCTs) normally to a pressure of 2900 to

3600 psi. The NG capacity of a GCT, termed in

standard cubic feet (scf) , working pressure,

temperature and composition of the NG. GCTs are

mainly cylindrical and vary in diameter and



length and can be made of steel or lighter-weight

composite materials – one technology uses coiled

small diameter pipe for marine transportation.

The natural gas in small volume , up to 800

MSCF can be tranposted easily thorugh a CNG

carrier.

They are widely used in industrial gas storing,

natural gas vehicle (NGV) station, transportation,

power generating plant, hotel, restaurant etc.

High pressure semi-trailer is widely applied in

the storage and transportation of natural gas,

hydrogen, helium, purified gas, etc.

This technoly enables gas transportation to

remote area just similar to diesel transport. The

module can be custom made to meet the local

infrastructure in remote area in term of using as

motor vehicle fuels or small scale power

generation. Similar economic apply in term of

utilizing coal versus CNG for smaller scale power

plants. Economic advantage in term of investment

to burn clean “coal” versus natural gas will be

elaborated in the next papaer.

Table 2: CNG Economics 3 I II III IV

Crude Price $/BBL 90 80 100

Well head gas price: $/MMBTU* 13.50 12.00 15.00 10.00 90% of crude price, compressed to 2500 PSI

Toll Fee to depot or CNG truck $/MMBTU 0.68 0.60 0.75 0.50 5% of well head price

gate price $/MMBTU 14.18 12.60 15.75 10.50

pump/ distribution margin, 3% 0.43 0.38 0.47 0.32 3% of CNG price

pump price 14.60 12.98 16.22 10.82

VAT 10% 1.46 1.30 1.62 1.08

Pump Price post VAT $ 16.06 14.28 17.84 11.90

Price /liter IDR 5,759 5,119 6,398 4,266 IDR/USD IDR/$ 9,500 9,500 9,500 9,500

Calculation in table 2 coupled with gas economics

in table 1 demonstrated that a liter equivalent of

natural gas can be sold around IDR 5,000 – 6,000

per liter equivalent. If the government can

improve the contractor take to 50/50, rather than

70/30, the well head natural gas price can be

reduced to $10/MMBTU and the pump CNG price

can be reduced to as low as IDR 4,266/liter

equivalent.

What GoI can do to increase Indonesian

Gas production for Domestic use

We know the GoI wants to increase oil and gas

production and to maximize the use of natural gas

for its domestic market. The effort should focus on

how to monetize oil and gas resources efficiently

and quickly. The GoI should maximize exploiting

the oil and gas to build the country while

protecting the environment from irresponsible

development. This will need to revisit the

execution of national energy policy.

There are opportunities and challenges for the

Indonesian Oil and Gas Industry, and the GoI and

Investors can work together to resolve them on

the exploration and development front. In the

exploration area, the opportunity comes as

industry growth moves from acquisitions to

exploration since the oil price increases starting

in early 2004. In a high crude price environment,

the industry is cash long and opportunity short.

Indonesia has good prospects, the attractive

incentives for will surely attract more interest if

other negative factors impairing or lengthening

the time of exploration success to first commercial

production can be reduced.

The challenges remain high as the international

oil and gas companies retain tight capital

discipline, whilst Indonesia is competing for

capital with more countries than ever before.

Indonesia’s high service cost environment and

lack of availability of equipment & services are

obstacles that GoI needs to speed up in resolving.

Also complicating the investment picture is the

uncertainty in law, regulation and taxes with

highly bureaucratic procurement process.

In the development area, Indonesia has many old

fields where additional oil can be recovered using

modern technology. However, the issues remain

similar to exploration opportunity. Intensify

development of CNG application will solve part of

the subsidy problems together with intensified

utilization of natural gas in the form of piped gas,

CNG and LNG for power generation where

feasible.



Conclusion and Recomendation

We are also aware that business decisions are

sensitive to the time-value of money. NPV, IRR

and Investment Efficiency are used to measure

the robustness of an investment decision. Longer

procurement and development time reduces NPV.

Longer cash return circle reduces NPV. Obviously,

the GoI imposed bureaucracy has negative impact

on NPV and hence lower the investors expected

return.

The GoI needs to be aware of the effect of WACC,

which is not “cost- recoverable”. A 20% IRR

project will be rejected by the investor if its

WACC is in the typical 15% to 25% range

(depends on the reputation and the risk profile of

the company). Most of Indonesia’s recent oil

discoveries are marginal with reserves less than

100 MBO, whereas investors are looking for 30%

to 40% IRR projects. GoI approval and

procurement bureaucracy are the major negative

contributors to NPV, not to mention the

reputation damage due to delay of retendering

and obtaining permits.

The challenges are:

Lower PSC bottom line take of GoI from 70% to

circa 50%

Apply IFRS accounting concept, where cost of

fund is part of operating expenses

Minimize local entry barrier,s make one

window permit to get all required permits for

project execution

Expedite the exploration success to production

cycle through debureaucratic current tendering

and controlling procedures

Simplify the system where applicable

1. Create an incentive program for car user to use

CNG, such as:

Lower motor vehicle ROAD TAX due to using

environmental friendly-clean fuel

Provide free Conversion kit from gasoline to

CNG to motor vehicle users.

Encourage car producer to sell CNG car by

giving higher tax credit incentives

A fair market driven energy prcing policy that

will create efficient gas market supporting the

calculated risked return of petroleum economic.

The government needs to respond to the

challenges quickly, the longer the government

waits, the more budget will go to subsidy of fuel

which is non productive, the fund can be diverted

to educate and build a better Indonesia. The

moment is now as Indonesia has received

favorable rating of Baa3 with stable outlook for

investment from Moody’s; BB+ from S&P and

BBB- from Fitch. These represent the positive

encouragement to the political stability in

Indonesia with sustainable strong GDP growth

above 6% p.a.

Epilog

Due to time constraint, the writer has limited his

research and discussion to economic expectaion

from private investors and national interest in

utilising utilising natural gas to replace liquid

fuel. The willingness and ability to utilise CNG in

lieu of gasoline to reduce subsidy, reduce oil

import and utilize otherwise uptapped or other

wise wasted clean and environmental friendly

energy named natural gas. This paper has not

covered in details on the switching of natural gas

to coal for its economic benefit and envrornmental

friendly character. The idea can further be

elaborated with more research and acation from

both government and investors. The paper is jsut

a start to further elaborate mechanism to work

out the implemenation plan, It takes two to tango!

Reference

1. Law No.22, Year 2001.

2. PWC report on Indonesia Oil and Gas: Exploring

the Black Gold* Investor Survey of the Indonesian

oil and gas industry-2008 & 2005.

3. PWC 2012 Oil and Gas in Indonesia: Investment

and Taxation Guides, 5th edition, May 2012.

4. Tjendrasa, Kinsenary, Exploring the Hidden reason

of Low Investment in Indonesian Upstream Oil and

Gas Exploration and Development. The 29th Pan

Pacific Conference in Haikou, Hainan Island, Chine

May 24-27,2012 .

5. Tjandranegra, Abdul Qoyum: GAS BUMI SEBAGAI

SUBSTITUSI BAHAN BAKAR MINYAK:

OPTIMASI INVESTASI INFRASTRUKTUR DAN

ANALISIS DAMPAKNYA TERHADAP

PEREKONOMIAN NASIONAL, a desertation to

defense his Doctorate degree from University of

Indonesia; July 2012.

6. Natural Gas Use in the Transportation Sector –

Center for Climate and Energy Solution, May 2012.

7. Indonesian Law no.22/2001 on Oil and Gas.

8. Wood MacKenzie July 2012: Price Increases boost

Indonesia gas developments.

9. Ministry of Energy and Mineral Resources report:

2011 Hand book of Energy & Economic Statistics of

Indonesia.

10. BP 2012 Statistics on Oil and Gas.

11. 2009, 2010, 2011 and 2012 IPA Convention Speech;

Key Notes Address and papers:



Chris Newton, Revisiting The Challenge, 1.3

MMStb/day in 2009; Continuing and Sustaining

investment effort to enhance energy sector activities

Priyono, R. OIL & GAS IN THE PRIMARY

ENERGY MIX: Bridging Fuel for Economic Growth

Sustainability; 23-25 May 2012, the 36th IPA

convention

Brodjonegoro, Bambang S: Fiscal Policies for Oil

and Gas Industry in Indonesia – 23-25 May 2012,

the 36th IPA convention

Santoso, Hendi Prio, Meeting Indonesian Energy

Needs; 23-25 May 2012, the 36th IPA convention

Legowo, Evita H, How Do We Work Together to

Achieve Presidential Instruction No.2 Year 2012.

23-25 May 2012, the 36th IPA convention

international journal advances in social science and

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