Natural Gas Business in Indonesia

Introduction

Gas is an energy future of Indonesia. It is a fact that cannot be denied anymore. Based on

existing data, throughout 2010 there were new discoveries of gas reserves are significant

enough to achieve 2.09 trillion cubic feet, while the discovery of oil only amounted to 140

million barrels only. On January 1, 2011, proved reserves position and potential of gas in

Indonesia reached 153.72 trillion cubic feet of proven and potential reserves and crude oil for

7.41 billion Barrels. (BPMIGAS Bulletin Issue, 2011)

If the reserves are produced with current production levels then the Indonesia's oil reserves will

run out for 12 years, while Indonesia's natural gas reserves are still able to survive to meet the

needs of up to 46 years. (BPMIGAS Bulletin issue 73: August 2011)

Figure below showed Natural Gas Reserve in Indonesia (Eddy Hermantoro, 2010)

Figure 1. Indonesia Gas Reserves

Natural gas is usually found deep below the earth’s surface and is made up of hydrocarbon gas

primarily methane (CH4). It is found in oil and gas field and coal mining area (Annual Report

PGN, 2010). Natural gas can be used as fuel either fuel for industry, vehicles, housing, power

plants and even as raw material for petrochemical products.

Figure 2. Natural Gas Composition

Compared to oil-based fuels and coal, natural gas has several advantages, namely:

1. Environmental Friendly

Natural gas burns more cleanly, releasing fewer (CO2) emissions into the atmosphere. Using

natural gas can therefore help to reduce greenhouse gases and global warming

Figure 3. Fossil Fuel Emission

2. Economically efficient energy

Natural gas has excellent economic value. Apart from being an environmentally friendly fuel

source, it is cheaper and has greater price stability than oil-based fuels. Comparison of

natural gas price and petroleum products can be shown at figure below based on crude oil

price of USD 106.72/barrel. (Annual Report PGN, 2010)

Figure 4. Fuel Price Comparison

Indonesian Natural Gas Business in 2001 - 2008

In order to give legal base to the renewal and reconstruction of the agency for upstream oil and

gas activity, the government has determined Act No.22/2001 in relation to oil and gas on 23

November 2001 (BPMIGAS Profile Website, 2012)

Since Act No.22/2001 on 23 November 2001 concerning oil and gas and Government

Regulation No.42/2002 on 16 July 2002 concerning BP MIGAS have been determined, the

matter of supervising and establishing Cooperation Contract or Productions Sharing Contract

(PSC / KKKS) activity which previously done by PERTAMINA is now done by BPMIGAS. (BPMIGAS

Profile Website, 2012)

PSC/KKKS is the Business Entity or Permanent Establishment that have right to perform on the

Exploration and Exploitation in a Work Area and have a Cooperation Contract with the Agency

executive (BPMIGAS). (PERMEN ESDM, 2010). Pertamina, Total E & P, Santos, Petrochina,

Conoco Phillips are a few examples KKKS natural gas producer in Indonesia.

Business Entity is a legal entity that runs the type of business permanently, continuously and in

accordance with established laws and regulations applicable as well as work and domiciled in

the territory of the Republic of Indonesia (Pedoman Tata Kerja BPMIGAS No :

029/PTK/VII/2009)

Prior to 2001, PGN was the only natural gas distribution companies in Indonesia. Since Act 22 in

2001 was published, private business entity (Private Natural Gas Distribution Company) can

participate in this natural gas distribution business.

Direktorat Jendral Migas have a role in determining the permission of KKKS, held a working area

tenders, issuing permits of Natural Gas Distribution Company.

Since Act 22 in 2001 was published, private natural gas distribution companies emerging. The

company buys and sells natural gas for industrial needs by using pipeline, CNG (Compressed

Natural Gas) and LNG Technology. The scheme of gas business flows from gas production to

end user can describe as figure below (Amrullah Hakim, 2005)

Figure 5. Natural Gas Business Scheme

In 2001 to 2008, sales of natural gas from KKKS have never been done in an open tender,

natural gas can be sold directly to natural gas distribution companies without any tender, in

other words, KKKS never announced to the media (newspapers, websites etc.) regarding the

potential for natural gas that will be commercialized. Hence, Natural Gas Distribution

companies who have network to KKKS will benefit from this kind of process. The process of

selling gas without open tender as mentioned above can lead to unethical business behavior,

because KKKS is the only one who gained full authorization from BPMIGAS to control the

commercialization process but KKKS did not doing a transparent business process.

What KKKS doing is not in accordance with the principles of good corporate governance that

includes Transparency, accountability, responsibility, independency, and fairness to attain a

company's sustainability by also considering the interests of stakeholders. (Binhaldi, 2006)

To avoid unethical business behavior, commercialization of natural gas process by KKKS must be

done transparently. KKKS must Provide timely, Appropriate, clear, accurate and comparable

information accessible to stakeholders that their rights commensurate with (Binhaldi , 2006).

Indonesian Natural Gas Business in 2009 – 2011

In 2009, BPMIGAS issued Guideline (PTK) No. 029/PTK/VII/2009 Working Procedures governing

the process of commercialization of natural gas. In the PTK 029/PTK/VII/2009, BPMIGAS

explains that the sales gas process can be done by direct appointment (without tender) to the

four priorities, namely:

1. Increased production of oil and gas

2. Fertilizer Industry

3. Electricity Supply

4. Local Region Government

Figure 6. BPMIGAS Natural Gas Direct Appointment Procedure (PTK No. 029/PTK/VII/2009)

EvaluationNot

Approve

Approval

Procedures

Evaluation &

Approval from

IP

Evaluation of Purpose & Proposal

OK

Purpose & Proposal

Direct Appointment

Purpose and Proposal

Direct Appointment

Revision

procedures for other buyers

selection

Approval of Purpose & Proposal

Direct Appointment

Preparation and discussion

of SAA

MoU, MoA, HoA, GSA Approval

Application for Price Approval

to Minister

Approval and SAA Signed

MoU, MoA, HoA, GSA

Preparation

MoU, MoA, HoA, GSA

Signed

Direct Appointment Buyer

BPMIGAS KKKS BUYER BPMIGAS KKKS BUYER

1

2

3

4

5

6

78

9

10

11

1213

1415

16

Guidelines for Working Procedure No. 029/PTK/VII/2009 BPMIGAS are reinforced by the

issuance of Ministerial Regulation No. 3 of 2010 regarding the allocation and utilization of

natural gas to meet domestic needs. Determination of Allocation Policies and Utilization of

Natural Gas Utilization implemented with priority for Natural Gas (Peraturan Menteri ESDM No

3, 2010):

a. increased production of the National Oil and Gas;

b. fertilizer industry;

c. electricity supply;

d. other industries.

In the period after the issuance of Working Procedure No. 029/PTK/VII/2009 BPMIGAS, many

natural gas distribution companies are approaching producing region governments (Regent or

Governor) and regional-owned enterprises (BUMD) because the region government through

BUMD can purchase natural gas from KKKS with direct appointment process or without any

tender process.

Regional-Owned Enterprises (BUMD / Perusahaan Daerah (Perusda)) are companies established

under Law No. 5 Year 1962 concerning Regional Companies and Minister of the Interior Law No.

3 Year 1998 concerning Form Regional Owned Enterprises

BUMD is a company established pursuant to the Region to conduct business activities. BUMD

have the privilege to get gas with direct appointment process but usually BUMD do not have

business experience and have no funds for investment, because of that issues BUMD usually

have a partner to do this business.

Selection of Regional Owned Enterprise (BUMD) partner in the utilization of natural gas in this

case done without an open tender, because it is not regulated in the Act in the area. The

chosen BUMD’s partners usually are those who have a network and proximity, and which can

bring benefits to both the benefits for the region and for personal gain.

Even though, a new working procedure (No. 029/PTK/VII/2009) has been made by BPMIGAS,

the conduct of unethical business still exists, because the shareholders and stakeholders do not

implement a good of governance in their business. There are two approaches in driving the

implementation of good corporate governance (GCG), ethics-based approach and regulatory-

based approach. Ethics-based approach is predominantly driven by the consciousness of

business practitioners in doing their business not only for short-term profit orientation but also

for more on a healthy longer-term relationship with their stakeholders. On the other hand,

regulatory approach is driven by the initiative to enforce company to comply with certain

designated regulations. Since each approach has its own strengths and weaknesses, they are

supposed to be complimentary each other in creating sound business environment. (Binhaldi,

2006)

Governance will not prevent misconduct of misdeeds, but it can actually improve the way a

corporation is run in Indonesia and for that matter other Asian countries. Corporate governance

can be perceived as the collection of control mechanisms that an organization adopts to

prevent or dissuade potentially self-interested managers from engaging in activities detrimental

to the welfare of shareholders and stakeholders. Corporate governance is a necessary to create

a more sustainable environment for competitive Indonesian businesses in a global economy

(Verhezen, 2011)

Conclusion

Natural Gas is a future energy in Indonesia, because Indonesia has a large reserve of Natural

Gas and Natural Gas is an environmental friendly and economically efficient energy compare

with other fossil fuel.

To create a sustainable environment and competitive natural gas business in Indonesia, it is

necessary for business practitioners to implement a Good Corporate Governance. There are

two approaches in driving the implementation of good corporate governance (GCG), ethics-

based approach and regulatory-based approach. They are supposed to be complimentary each

other in creating ethical business in Indonesia

Reference List

Amrullah Hakim, Irawan Sumardi, 2005, An Introduction of Gas Business and Its

Competitiveness for Electricity Sector in Indonesia, 20th World Energy Congress, Rome, Italy

Binhaldi, Yunus Husen, Irwan Habjah etc, 2006, Indonesia‘s Code of Good Corporate

Governance, National Committee on Governance

BPMIGAS Bulletin issue 73: August 2011

BPMIGAS Profile Website, accessed on 04 Feb 2012 at 05.00 pm

Eddy Hermantoro, 2010, POLICY AND OPPORTUNITIES IN INDONESIA OIL & GAS INDUSTRY

Pedoman Tata Kerja No : 029/PTK/VII/2009 Tentang Penunjukan Penjual dan Penjualan Gas

Bumi/LNG/LPG Bagian Negara

Peraturan Menteri Energi dan Sumber Daya Mineral No 03 Tahun 2010

Peter Verhezen, Erry Riyana Hardjapamekas, Pri Notowidigdo, 2011, Is Corporate Governance

Relevant? How corporate Governance practice can affect Indonesian organization

PGN Annual Report, 2010