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Indonesia shopping for LNG to meet demand

One of the world's biggest exporters of LNG is looking to buy 5-10m mt/year of the super-cooled fuel by 2020 to help meet surging demand at home

More LNG could be needed if the Indonesian government’s proposed new oil and gas law fails to attract investment in its ailing upstream. 

Although it is the world’s fourth largest LNG exporter, Indonesia faces a ballooning gas supply deficit, forecast to hit 4bn cf/day by 2025. To start plugging that gap, 12m mt/y of LNG are needed by 2020, Syahria l Mukhtar, a strategic advisor at national oil company (NOC) Pertamina, told the IBC LNG conference in Jakarta. 

Indonesia LNG exports

Pertamina has already nailed down 1.5m mt/y of LNG supply starting in 2019 from Cheniere’s Corpus Christi project in the US. Another 1.4m mt/y will be sourced from Indonesia’s own Bontang plant starting 2017. The NOC is in advanced talks with suppliers at home and overseas for another 5.1m mt/y, leaving an additional 4m mt/y still to be found, says Mukhtar. It would make Indonesia a relatively big buyer on the global market. 

Indonesia is in the process of drafting a new oil and gas law, which aims to establish a national gas aggregator, a role Pertamina is lobbying the government to fill. As the country starts to import LNG, it’s more efficient for a single entity to negotiate with suppliers, particularly in the beginning when the volumes are small, Mukhtar told Petroleum Economist. “It will remove the danger that suppliers get confused by approaches from other companies, such as state-backed utility PLN or national gas supplier PGN. We could also more efficiently balance supply and demand,” he adds. 

But LNG sellers should be worried about Pertamina’s credit risk, a prominent LNG consultant, who declined to be named, said. The consultant added that Indonesia would not want to put “all its eggs in one basket” with US LNG supply, noting that shipping distances from the US are relatively long. Pertamina is considering deals in east Africa, as well as Papua New Guinea and Australia, which are closer to home.  

In the past, the government viewed energy as a commodity, but it’s now seen as a driver for economic growth. Indonesia is projected to be one of the fastest growing countries in the Association of Southeast Asian Nations (Asean), with an average economic growth rate of 6% between 2014 and 2018, data from the OECD show.

Gas infrastructure investment

Indeed, the focus has shifted from exporting gas to securing it for the people. President Joko Widodo, who took office in October 2014, has pledged to deliver 35GW of electricity across Indonesia by the end of his term in 2019. It’s an ambitious plan considering the country had installed capacity of around 51GW in 2013. Under the electrification plan, LNG would supply one-third of the incremental power with just over 1m cf/d of gas needed to fuel 13.4GW, said Agus Cahyono Adi, a director at the ministry of energy. Plenty of gas would still be needed even if the country hits only half the electrification target. 

Still, connecting gas reserves to markets remains a challenge for Indonesia given the infrastructure challenge of linking its 17,000 islands. Mini-LNG and floating regasification terminals are the solution. “They will provide a virtual pipeline as part of a hub and spoke distribution system,” Mohammad Faradhy, a procurement engineer at state utility PLN told the conference. But the government will need to attract some $32bn in gas infrastructure investment (Table 1) by 2025 to connect gas reserves, most of which are in the east, with major demand centres in Java and Sumatra in the west. Also, urbanisation and demand in other areas of the country are rising at a faster pace than energy infrastructure development.

In the long-run, PLN expects gas will be more competitive than fuel oil for power needs. But assuming an oil price of $40/b, fuel oil can be delivered to the plant gate at $9-9.5/m Btu equivalent, where as oil-linked LNG would cost nearly $10/m Btu equivalent, said Faradhy. The break-bulk LNG model is probably not economical until oil is at $55/b, he added.

Based on current projections Indonesia’s gas reserves will be rapidly depleted over the next 10 years, so the government needs to think more about importing LNG from abroad, cautioned Faradhy. 

Declining production is an overwhelming trend in Indonesia. Investment has waned in the oil and gas sector due to the uncertain regulatory and business environment, while lower oil prices have not helped. As of August $9.7bn had been poured into the oil and gas sector so far this year. Far short of the $20.4bn target, data from the energy and mineral resources ministry showed. 

Exports and domestic gas supply

If projects under consideration, such as the expansion of BP’s Tangguh LNG plant and the proposed Inpex/Shell Abadi floating LNG (FLNG) scheme, continue to be held up, then there will be more room for LNG imports, Faradhy added. 

But whether new projects can reach a final investment decision (FID) in today’s low oil price environment is questionable, said Rajinish Goswami, a gas and power specialist at energy research firm Wood Mackenzie. 

BP has pushed back FID on its third 3.8mn t/y train at the Tangguh plant to mid-2016. First gas will be delayed till 2020 from 2019 initially. The $12bn expansion, which is in the front-end engineering and design phase, will sell 1.5m mt/y to PLN. Another 1m mt/y will be shipped to Kansai Electric Power in Japan. But the UK major is still seeking buyers for the remaining production, and said in April that it will be difficult to proceed with the planned third train without sales deals for the remaining 1.3m mt/y of output. 

Meanwhile, Inpex’s proposed 7.5m mt/y Abadi FLNG project at the Masela Block is bogged down in a political skirmish. The planned development in the Arafura Sea in eastern Indonesia was in the spotlight recently after coordinating minister for maritime affairs Rizal Ramli opposed the FLNG plan. He claimed an onshore development would be cheaper and create greater local benefits in the region. Inpex was close to getting approval from upstream regulator SKKMigas for its development plan prior to Rizal’s comments. 

Given the huge scale of the proposed scheme, the government plans to appoint an independent consultant to assess the options for the block’s development. 

Cost is at the heart of the dispute. Rizal claims an onshore plant would cost around $15bn compared to the FLNG proposal at more than $19bn. However, SKKMigas disagrees, saying that an FLNG scheme would need only $14.8bn, while the onshore scheme would require more than $19bn.  

“It’s not only about the money. If we built onshore, in a 10-year-period we would have a new Balikpapan in the area because Masela has bigger reserves than Mahakam. However, there are officials that are confused by lobbying by foreign interests and want to decide on an offshore plant,” the Jakarta Post reported Rizal saying.

The energy ministry initially planned to take a decision by 10 October. The new timeline is unclear, particularly since an independent consultant has yet to be appointed. 

Given Indonesia still has significant gas resources, boosting exploration and production should be a top priority for Indonesia, added Wood Mackenzie’s Goswami. Indonesia had 103.4 trillion cf of proved natural gas reserves in 2015, down slightly from 104.7 trillion cf in 2013. The country’s proved natural gas reserves are the 13th largest in the world, and the second largest in the Asia-Pacific region, after China.

Still, Indonesia, which has the Bontang, Tangguh and Dongi Senoro LNG plants running, has a great opportunity to boost capacity. If proposed new projects go ahead, the country’s LNG output could hit 30m mt/y by 2030, data from Wood Mackenzie show. There is still revenue and value to be had in meeting export demand, while the domestic market obligation (25-30% of new gas production) will help meet domestic needs, said Goswami.

But the uncertainty surrounding the proposed new oil and gas law, which is set to introduce a new regulator, has made the international oil companies operating in Indonesia, which include US majors Chevron, ExxonMobil, ConocoPhillips and European majors BP and Total, nervous about future investments.

In short, the draft law will hand significant privileges to Pertamina. The NOC will get first right of refusal on expiring legacy contracts and new blocks. The law will also introduce gas aggregators, which will control pricing and effectively nationalize the midstream. Regulated prices will be determined by field development economics without consideration for exploration risk, which does not bode well for future investment or Indonesia’s reserve replacement ratio for gas, which although better than oil, dropped to 90% in 2014 from 127% in 2012. 

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