Indonesia’s LNG focus reflects upstream failings

Indonesia is stepping up efforts to develop its LNG import infrastructure as domestic exploration is mired in bureaucracy and production is unable to meet the country’s growing energy demand.

LNG has become increasingly important in filling the supply gap. Indonesia’s imports of the fuel were up by 63% year on year in October, with a greater proportion of the country’s output destined for domestic use.

Indonesia’s second LNG terminal, which has a planned capacity of 4 mtpa, is being built in Bojonegara in East Java by Pertamina Energy, BumiSaranaMigas (part of the Kalla Group conglomerate) and Tokyo Gas.

The project will receive funding from the Japan Bank of International Cooperation (JBIC). Pertamina spokesperson WiandaPusponegoro confirmed her company will be the offtaker for the terminal’s output.

Yoga Suprapto, chief executive of Jakarta-based consultancy RinderEnergia and former vice president of LNG business development at Pertamina, said the participation of Tokyo Gas is important not only for the company’s technical knowledge but also to attract JBIC funding.

Japan and Indonesia have a mutual agreement on economic cooperation. JBIC has provided financing for several LNG projects in Indonesia, most notably and recently the DonggiSenoro plant in Sulawesi. However, past partnerships have focused on projects where Japanese buyers have taken the produced LNG.

“Pertamina’s track record in LNG and financial strength makes it a secure enough offtaker. It is a secure investment for JBIC, even if triple-A Japanese buyers are not involved,” says Suprapto.

The price factor

According to market players, price is the key feature that will enable LNG to compete against natural gas and cheap, readily available coal – especially in the power sector.

However, because the price differential between LNG and domestic gas has narrowed to below $3/MMBtu this year, imported LNG can increasingly be used instead of domestically produced gas – but only if local governments simplify the upstream approval procedures.

“Indonesia is famous in its inability to convert local demand into sales,” said Suprapto. He added the country’s gas sector needs less private participation and more government investment via state-owned enterprises, likening gas exploration and production to public infrastructure such as roads and railways.

Meanwhile, Pertamina is directing its focus away from exporting LNG. Pusponegoro says the company is looking at developing an FSRU in Central Java and using small-scale LNG projects to expand east Indonesia’s access to energy. It is also looking to secure future supplies through long-term domestic and international LNG contracts.

However, the focus on LNG is highlighting Indonesia’s upstream failings.

“The uptrend in LNG imports reflects the bottleneck in natural gas supply. The national gas supply is currently unable to fulfill demand. We see no significant expansion in gas in the next 2-3 years,” said William Simadiputra, equity analyst at DBS Vickers Securities in Jakarta.

The main problem for Perusahan Gas Negara (PGAS), Indonesia’s largest gas distributor, is the country’s struggling upstream sector rather than the effect of Indonesia’s weakening economy and currency, said Simadiputra in a recent report.

“Indonesia’s oil and gas industry reform progression is slow and, in the meantime, we do not see any positive impact for PGAS,” he said.

In a previous report, Simadiputra highlighted that the slowing gas demand was being caused by a cyclical economic slowdown. However, he also said supply is likely to be constrained by the limited amount of upstream expansion, even when demand revives.

Indonesia’s gas demand has doubled since 2005, according to the United States Energy Information Administration. Its consumption of the fuel increased to 56 billion cubic metres in 2013 from 39.3 bcm in 2012 and is expected to rise to 105 bcm by 2028, according to figures from the International Energy Agency.

Two factors are preventing domestic output from reaching its true potential: unwieldy local bureaucracy and undeveloped infrastructure. Despite a push by the central government to increase domestic gas production, local government often fails to make the necessary changes, Simadiputra said.

“It can take 10 years for a project to come [online] after receiving approval from central government. Central and local government coordination is very poor; you can often get central approval but not on the local level,” he added.

Bottlenecks in infrastructure development are also stunting the growth of domestic gas production in Indonesia. The majority of the country’s gas fields are in the east, where infrastructure is poor, said Simadiputra, making it difficult for foreign contractors to develop them.

https://interfaxenergy.com/gasdaily/article/18647/indonesias-lng-focus-reflects-upstream-failings