Gas Development Master PlanSteering Committee Meeting – 28 March 2013Draft Policy Note 4 : Policy Support for the Development of Domestic Gas Markets

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Coverage of the Policy Note• Developing the domestic gas market requires large

upstream, midstream and downstream investments• Financing these requires committed, long-term, reliable

demand from downsteam ‘anchor’ customers as well as increases in domestic gas prices

• We have reviewed the impacts of current government policies on the ability to finance the necessary investments– Allocation of gas supplies– PLN as an anchor customer– Promoting natural gas use by transport– Transportation third party access (TPA)

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Allocation of gas supplies• The current priority allocation to fertiliser and power

generation creates disincentives for upstream developers– increasing gas prices to these uses pushes up subsidy

requirements– therefore, we expect pressures to keep gas prices low for sales to

fertiliser production and power generation– in turn, this reduces the attractiveness to upstream developers of

sales to the domestic market

• The allocation policy also appears to be ineffective– both PT Pupuk Indonesia and PLN complain of a lack of reliable

gas supplies

• Our initial analysis suggests that additional revenues from increased domestic gas prices would offset increased subsidies (for fertilisers at least)

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Gas prices and fertiliser subsidies

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0.00 1.00 2.00 3.00 4.00 5.00

Rs bnRs/kg

Increase in domestic gas price (US$/mmbtu)

Fertiliser subsidy

Increase in government PSC revenues

Urea market price

Urea break-even cost

Urea HRP

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PLN as an anchor customer• PLN’s current plans are for little new base-load gas

generation, in response to concerns over the lack of reliability of supply– “gas supply to PLNs existing power plants is not secured, and

getting more critical in the longer-term“ (PLN, IndoGAS 2013)– of 6.7GW of planned gas-fired capacity in the RUPTL, 4.3GW is in

the form of gas turbines using LNG and CNG to provide peaking capacity and serve isolated networks

• New power generation, therefore, seems unlikely to provide significant anchor load

• There is potential anchor demand from switching existing GTs and CCGTs from diesel and fuel oil to gas (~550 mmscfd)

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Planned PLN gas demand (RUPTL)

2,706 3,021

10,279

12,079

414 322

943 1,291

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2013 2021 2013 2021

MW MMSCFD

Gas demand (MMSCFD)

Capacity (MW)

Jawa-Bali

Indonesia Barat

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Promoting natural gas use in transport• Current pricing differentials appear insufficient to

encourage switching to CNG• Increasing these differentials requires either increasing

Premium prices (but this removes much of the rationale for promoting switching), or reducing CNG prices

• The implication is that there will be further pressure to reduce gas prices for sales to the domestic market, and as a result lower incentives for upstream development

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Fuel switching incentives compared

3,1002,245

4,500

12,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

CNG Gasoline CNG Gasoline

Indonesia Thailand

Rs/LSP

c

c

Conversion cost of Rs 13 millionPay-back9,285 litres125,000 km (@13.5km/litre)>6 years (@20,000km/year)

Pay-back<1 year

Rs 1,400/LSP

Rs 9,285/LSP

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Transportation third party access• Current regulations appear to work reasonably well, with

multiple users of many pipelines• There is a lack of clarity over how utilisation is measured

and whether ‘use-it-or-lose-it’ requirements apply• Current tariffs reduce with pipeline use. The result is to

create a perverse incentive for third parties to access the most heavily-used pipelines

Segment Diameter (inch)

Length (km)

Capacity (mmscfd)

Utilisation (mmscfd)

Tariff (US$/ MSCF)

Comparison 1 Simpang Y – PURSI

12 28.6 40 2 (5%) 0.24 14 28.6 60 35 (58%) 0.17

Comparison 2 KM53 – SKG Bontang

16 13 200 100 (50%) 0.05 20 13 250 0 (0%) 0.11

Source: BPH Migas (2012)

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Recommendations• Government should consider dropping the existing

priority allocation for domestic gas supplies and allow price to dictate allocation (after a transitional period)

• A review of the consistency of PLN’s planning policies against policy for the domestic gas market is desirable

• We question whether current pricing can support a market for gas in transport. We recommend this policy is further reviewed and the wider implications for the gas industry considered in more detail

• We have minor recommendations for enhancements to the TPA regime. These include introducing use-it-or-lose-it provisions and amending the tariff methodology