SUBSTITUTION OF OIL FUEL WITH NATRURAL GAS AND ITS IMPLICATION TO THE NEED OF GAS INFRASTUCTURE DEVELOPMENT 1 Montty

Girianna 2, Filia Arga 3 Abstract Since 1950, the government of Indonesia has implemented a policy of affordable oil fuel provision. The policy lasted for more than 50 years, and during this period of time the policy did not have a negative impact on neither the national energy supply nor the State Budget. But since 1997, the combination of reduced production of national crude oil, and increased domestic fuel demand forced the need to import fuel and crude oil. Since then, the provision of affordable fuel has been supported by fuel subsidies, which reflects the gap between the domestic fuel price and the international market price. The value of this fuel subsidy grows larger along with the increase of the world crude oil price, while national demand of fuel continues to rise. While this subsidy is a burden to the State Budget, the fuel subsidy also lowers the national foreign exchange reserve and leads to distortions in energy prices. In addition, fuel subsidies contributed to the wasteful use of fuel and increased carbon-dioxide emissions (CO2). This paper explores and identifies options, and recommends the best ways that natural gas can help support Indonesias economic growth, and explores what are the greatest opportunities for natural gas to benefit the countrys growing economy and its consumers. It argues that the utilization of natural gas for the domestic market can reduce fuel subsidies, reduce the vulnerability of the state budget to the volatility of world oil prices, and reduce carbon-dioxide emission. By using the 2009 national budget data, 25% fuel substitution with natural gas will reduce the subsidy expenditure by 17%, and would reach 34% if the substitution is doubled. In addition, selling gas domestically, even with prices below export prices will not significantly harm or reduce the net state revenue. Moreover, this fuel substitution will reduce CO2 emissions by 4.82 million tons per year. The substitution of oil with natural gas requires larger gas supply. Twenty five percent of fuel substitution will increase the national gas demand, with 900 to 1.000 MMSCFD (million standard cubic feet per day). Approximately 75-80% of this increase represents additional demand for gas in Java. The paper argues that in order to enhance the consumption level of gas in domestic market, significant investments in gas infrastructure is required to transport gas from the gas fields to the gas demand centers. Given the large investment required, the paper suggests a number of key issues that need to be addressed, to create a viable and creditworthy gas infrastructure. 1. Introduction 1.1. General Since 1950, the government has implemented a policy of affordable fuel provision. The policy lasted for more than 50 years, and during that period, and it did not have a negative impact on neither the national energy supply nor the State Budget. This was possible because all the fuel needs could be met by the governments take in national oil production, based on Production Sharing Contracts (PSC). But since 1997, due to the reduced production of national crude oil, and domestic fuel demand increase, fuel had to be imported. Since then, the provision of affordable fuel supplies had to be supported by a fuel subsidy, which reflects
The 3rd IRSA International Institute, 2011 Director for Energy and Mineral Resources, and Mining, The National Development Planning Agency, BAPPENAS, girianna@bappenas.go.id, montty@alum.mit.edu 3 Staff for Directorate for Energy and Mineral Resources, and Mining, The National Development Planning Agency, BAPPENAS, filia.dewi@bappenas.go.id
2 1

the gap between domestic fuel price and international market price. The value of this fuel subsidy grows larger along with the increase and volatility of the world crude oil price, while national demand of fuel continues to rise. Besides being a burden to the State Budget, the fuel subsidy also lowers the national foreign exchange revenue and leads to distortions in energy prices, so that alternative energy (energy except oil and coal) cannot be developed properly. Fuel subsidies have also contributed to the wasteful use of fuel and increase of carbon-dioxide emissions (CO2) causing environmental pollution. In addition, benefits from the application of fuel subsidies are often less efficient to reach its original target group, the low-income communities. This happened because in fact most of the fuel subsidy (70%) was enjoyed by industry and people with upper middle incomes - people with private vehicles. Utilization of natural gas to replace oil fuel can reduce the negative impacts of the oil fuel subsidy policy. The benefits of this change are: (i) reduction in the volume of national fuel demand and the size of the fuel subsidy that must be paid from the State Budget, (ii) increasing foreign exchange savings, and (iii) increasing the potential for operating cost efficiency of energy consumers, since gas is less expensive than oil. In addition, as gas is a cleaner energy than oil fuel, emissions of CO2 released from burning will also be reduced. The paper argues that in order to enhance the consumption level of gas in domestic market, significant investments in gas infrastructure is required to transport gas from the gas fields to the gas demand centers. Given the large investment required, the paper suggests a number of key issues that need to be addressed, to create a viable and creditworthy gas infrastructure. Taken together, the paper argues there is a need for a review of the gas sector investment climate, balancing the risk/reward system between Government, State-Owned and private enterprises and enhancing financial transparency through comprehensive financial modeling allowing efficient pricing of risk and rewards for stake holders. The need for longterm financing is quantified, and the case is made for strategic gas infrastructure planning, and reliable public-private partnerships. 1.2. Existing Gas Infrastucture To facilitate a transition from oil to gas investments in gas sector infrastructure are definitely required. The first gas infrastructure investment Cilegon to Cilamaya gas transmission pipeline was built by the state-owned oil company, PT PERTAMINA, in 1965. Gas delivered by the pipeline is then used as a source of gas supply for distribution in the region crossed by the pipeline, such as Jakarta, Bogor, Bekasi, Tangerang and Cilegon, and the Kujang fertilizer plant Cikampek. In 1993, the state-owned gas company, PT PGN, began planning the construction of Grissik-Duri gas transmission pipeline, which has been completed in 1998. PT PGN then introduced the concept of Integrated Indonesian Gas Pipeline Network in 1998, involving eight main transmission pipeline segments. In the period 1998-2003, PT PGN built Grissik-Singapore pipeline segment, followed by the South Sumatra West Java (SWJ) segment building in the period 2003-2007. In 2005, the government formally issued a Master Plan for a Transmission and Distribution Network of the National Gas, on the basis of which, in 2006, the National gas regulator (BPH Migas) has provided three licenses for the construction of three-transmission pipeline segment. However, the development of the third segment has yet to be implemented. The distribution pipeline networks for gas (not always natural gas, but also oil) have existed since the Dutch era but its capacity is relatively small. The network was built in several big cities, like Jakarta, Surabaya, Bandung, Medan, Palembang, and Makassar, and is still functioning properly until today. Until 2003, PT PGN has been expanding and operating the distribution pipeline network in 13 regions. Currently, the government through the

Directorate General of Oil and Gas is preparing Household distribution network development in 18 cities, with completion targets in 2014. Bontang LNG Plant (exporting since 1977) in East Kalimantan and Arun in Aceh (1978) are two LNG Plants that are used to supply LNG to Japan, Korea, and Taiwan. In 2010, the Tangguh LNG plant in Papua began exporting LNG to China. The LNG Plant in Donggi Senoro is currently in preparation stage of development, with the aim to supply LNG to overseas markets. Although domestic gas consumption, especially in Java, has significantly increased, until now Indonesia does not have an LNG receiving terminal. Construction of two LNG terminals initiated by PT PERTAMINA, PT PGN, and PT PLN in Medan (North Sumatra) and Muara Karang (West Java) has been set up since 2006, but until now the development is constrained by the lack of certainty of the allocation of gas supplies and buyers (off-taker). Stations of Compressed Natural Gas (CNG) began operating in Indonesia in 1984, which at the time PT PERTAMINA acted both as operator and natural gas (BBG) industry regulator. In that year, there were 16 units CNG dispenser/gas stations built, but currently (2011) there are only 6 units that are still able to operate. The main cause is the relatively low price of gas so that the development and operation of gas dispensers is not economically feasible. Compared with other countries that develop CNG, such as India and Pakistan, the development of CNG industry in Indonesia is significantly lower. Until 2011, the available gas infrastructure is still limited and exists out of a 3,634 km long gas transmission pipeline network (open access) that stretches along Central and South Sumatra and supplies gas to Western Java. A 689 km long gas distribution network supplies gas to the cities in Sumatra and a 3,244 km long gas distribution network to the cities in Java. The existing gas transmission and distribution network is well reviewed in a report prepared by PGN (Gas Pricing and Utilization Study, PGN 2006). An excellent study on the development of gas transportation project with private participation was made by BAPPENAS (Gas Transportation Project through Public Private Partnership, BAPPENAS, 2005). Issues on privatization, gas pricing and open access to gas networks were carefully reviewed by a number of reports (Open Access to Indonesian Gas Network, BPH Migas 2007 and PGN Privatization Study, Price Water House, 2006). There are LNG processing plants built in Indonesia, these are the LNG liquefaction plant at Arun 12.65 MMTPA, Bontang 21.64 MMTPA, and Tangguh 7.6 MMTPA, which make Indonesia as one of the largest LNG supplier in the world with a total capacity of LNG 42.09 MMTPA. However, these are only used for export. 1.3. State Revenue from Gas, Oil Subsidy, and CO2 Emission State revenue from oil and gas, comes from tax revenues and oil and gas sales based on Production Sharing Contracts (PSC). As shown in Figure 1, in 2009 total revenue from the oil and gas sector, that is the Income Tax and Non Tax Revenue, reaches Rp. 175.9 trillion, or approximately 20.25% of total state revenue. The revenue, mainly from the sale of gas, has increased quite significantly from year to year, mostly after the long-term gas sales contract has been signed and gas fields are already in production. Foreign exchange earned from gas sales in 2009 reached approximately Rp. 35.6 trillion (20.3% of total oil and gas revenues), and if added with income tax from gas, then gas revenue reaches Rp. 68 trillion, or about 38% of the total oil and gas revenues. In 2008 the Indonesian Crude Price (ICP) almost reached U.S. $ 100 per barrel and gas revenues also increased to Rp 90 trillion, or about 31% of the total oil and gas revenues (Rp 290 trillion). Although state revenue from the gas tends to increase from year to year, but it is still relatively less compared to the expenditures for the fuel subsidy. In 2003, when the world oil price was low, about U.S. $ 22 per barrel, revenues from gas could compensate the fuel

subsidy spending. However, in subsequent years in which world oil prices continue to rise the difference of gas and fuel prices is widening the mismatch between state revenues from gas and fuel subsidy spending becomes greater. In 2008, when gas revenues reached Rp. 90 trillion, fuel subsidy already reached Rp. 140 trillion, or about 15% of total state revenue. The trend of the fuel subsidy increase is primarily due to the national dependence on imported fuel supplies, both imported crude oil and fuel imports, whose prices tend to rise. In recent years, import of fuel reaches about 30-40% of the total national requirement. Besides influenced by world crude oil prices, the value of the fuel subsidy is also influenced by the volume of fuel consumed domestically, which in the last ten years has grown with a high rate. National fuel demand growth is mainly driven by subsidized gasoline demand in the transportation sector, and non-subsidized diesel in the energy/electrical and industrial sector. In 2009, the consumption of subsidized fuel (Gasoline and Diesel) in the transportation sector reaches 33.1 million-kilo liters (KL). This fuel consumption rate causes emission of carbon dioxide (CO2) of 85 million tons, of which approximately 60% of these emissions come from fuel combustion in vehicles using Gasoline fuel. Consumption of nonsubsidized diesel for the industry and electricity reached 16 million KL with CO2 emissions of 46 million tons.
300,000 250,000 (Billion Rp.) 200,000 150,000 100,000 50,000 Fuel Subsidy Income Tax from Oil Non-tax State Revenue from Oil Income Tax from Gas 2002 6,584 2003 6,298 2004 8,041 2005 2006 2007 2008 2009

32,071 19,320 67,686 100,000 68,895 83,973 140,170 41,563 10,972 14,619 16,290 29,635 18,361 47,686 42,969 63,060 71,760 106,030 103,280 169,020 90,061 10,885 12,665 14,906 24,004 28,518 27,258 47,384 31,683

Non-tax State Revenue from Gas 12,325 18,533 22,199 30,939 35,190 31,179 42,595 35,806

Figure 1 Oil and Gas State Revenue, and Fuel Subsidy (2002-2009) 1.4. Domestic Natural Gas Production and Consumption

Natural gas production in 2009 reached 8,389 MMSCFD. Natural gas production levels vary widely for each region. Northern Sumatra, including the Natuna, Central/South Sumatra, East Kalimantan, and Papua are four regions with very large gas reserves. Eastern Kalimantan is projected to produce gas up to 2,900 MMSCFD, Middle / South Sumatra 2,000 MMSCFD, Papua 1200 MMSCFD and Natuna 675 MMSCFD. Gas reserves in Papua and Natuna are quite large and quite feasible for accelerated development, so that the production for each field can be increased exceeding 2,000 MMSCFD. National gas consumption in 2009 as shown in Figure 2 is approximately 7,000 MMSCFD (excluding the owned-use and

gas-flare), while about 60% or 4,200 MMSCFD is for export, the remainder, about 2,800 MMSCFD is domestic consumption used for raw material for fertilizers /petrochemicals (27%) and non-fertilizer industry (39.5%), and electric fuel (34.5%).
6,000 5,000 MMSCFD 4,000 3,000 2,000 1,000 Export Fertilizer & Petrochemical Industry Electricity Non-fertilizer Industry Self-combustion + Flare 2002 4,769 728 950 411 1,461 2003 5,049 703 944 559 1,387 2004 4,308 693 1,155 476 1,197 2005 4,615 706 1,209 402 1,247 2006 4,377 670 1,373 441 1,231 2007 4,182 679 1,383 368 1,075 2008 4,277 575 1,532 561 1,176 2009 4,168 765 962 1,105 1,389

Figure 2 Natural gas Consumption Export and Domestic Use (2002-2009) 2. A Scenario of Gas Substitution for Oil Fuel By 2015, consumption of subsidized gasoline fuel is expected to reach 23.9 million kilo liter (KL) and diesel fuel 12 million KL. Substitution of fuel by gas in the transportation sector can be done gradually, adjusted to the availability of gas infrastructure and domestic gas supply, for example starting with 25% substitution, then 50%, and 75% of the total national fuel needs. Besides for the transportation sector, fuel substitution scenario is also based on assumptions for the sectors that consume non-subsidized diesel, such as industry and electricity. Substitution scenarios can be developed regarding to the readiness of this sector in implementing fuel-switching from fuel to natural gas. Phasing of the fuel substitution can be done with various scenarios, for both subsidized fuel in the transport sector and for non-subsidized fuel in industry and electricity. Table 1 shows the scenarios of fuel substitution by gas: 25% for subsidized fuel in the transportation sector (Scenario I) and 50% for subsidized fuel in the transportation sector (Scenario II). Currently, utilization of gas as fuel (Bahan Bakar Gas or BBG) in the transport sector is still very marginal, so BBG percentage in the transportation sector can be considered 'zero'. Replacing 25% and 50% of subsidized fuel with BBG denoted as Scenario I and Scenario II, respectivelly, means increasing the role of BBG in the transportation sector. Scenario III is similar to Scenario I that is replacing 25% of subsidized fuel in the transportation sector by gas but added with 5% diesel substitution in industrial sector, and 15% diesel in the energy sector/ power plants. Currently, the percentage of BBG in the industrial fuel portfolio is roughly 24%, and the substitution 5% fuel by gas makes the role of BBG increase close to 29%. While 15% substitution of diesel for electricity increases BBG use from 16% to 31%. Some other fuel substitution scenarios have been developed from these three basic scenarios.

Export gas prices currently (June 2011) range between U.S. $ 12-14 per MMBTU, while domestic gas prices are around U.S. $ 7 per MMBTU. These two gas price scenarios are used to utilize gas domestically, these are: the price of gas in accordance with the export price (Scenario P1) and gas prices 25% lower than the export price (Scenario P2). Domestic gas sales with export price is the most promising, where the state income from gas will not decrease, and its implementation is relatively easy compared to the scenario where the domestic gas sales use prices lower than the export price. The three scenarios of fuel substitution by gas (Scenario I, II, and III) and two domestic gas price scenarios (Scenario P1 and P2) are used as a reference in the discussion and exercise about fuel substitution by gas, and further analysis will be based on these scenarios.

Types of subsidized/nonsubsidized fuel Subsidized Fuel Substitution

Fuel Volume Projection in 2015 (million KL)

Oil Fuel Substitution Scenario I II 50% 50% 0% 0% III 25% 25% 5% 15%

Premium Diesel

23,9 12,0 10,2 16,5

25% 25% 0% 0%

Non-Subsidized Diesel for Fuel Substitution Industry Diesel for Electricity

Table 1 Gas Substitution Scenario for subsidized fuel (transportation) and non-subsidized fuel (industry and electricity) 3. Fuel Subsidy Saving Fuel substitution with natural gas will reduce fuel subsidy spending. Besides reducing domestic fuel demand, gas substitution per million kilo liter is less expensive than the provision of fuel. Fuel provision costs consist of the cost of refining oil supplies and refining crude oil either produced domestically or imported, cost of transport, as well as the purchasing cost of fuel imports, while the cost of gas supply is the cost of liquefaction, shipping fee, gasification (for CNG / LNG) and / or the cost of pipe transportation(pipe system). In 2009, the purchase of imported fuel carried a price of about Rp. 5,300 per liter for premium and approximately Rp. 5,400 for diesel, while gas is exported at a cheaper price, which is about Rp. 2,800 per liter equivalent. As shown in Figure 1 earlier in 2009, actual state revenue from oil and gas is Rp. 175.9 trillion. Subsidy expenditure to meet the domestic fuel consumption of 37.7 million KL reached Rp. 41.6 trillion. With the amount of subsidy expenditure, net revenues from oil and gas is Rp. (175.9 to 41.6) = Rp. 134.3 trillion. Fuel substitution by gas will not lower state revenues from oil and gas as a net to the contrary it will increase, due to reduced fuel subsidy expenditure. Figure 3 demonstrated that if Scenario I fuel substitution by gas (of 25% subsidized fuel for transport sector) by the gas applied to the year 2009, the fuel subsidy spending will decrease from Rp. 41.6 trillion to Rp. 34.5 trillion, or a savings of about Rp. 7.1 trillion (17%), and net revenues from oil and gas to Rp. 141.5 trillion. As shown in the image, the savings will be even greater if the substitution of fuel by the gas was increased to

two-fold (Scenario II). With the substitution of 50% fuel subsidy savings of Rp. 14.2 trillion, or 34% of expenditure without the substitution of fuel subsidies, and net revenues from oil and gas to Rp. 148.5 trillion. Substitution of fuel by gas will not lower state revenues from oil and gas, if gas prices in the country are determined equal to the price of gas exports. If domestic gas prices are lower than export prices, the government revenue from gas sales will decline. But the drop in revenue is also followed by a decline in spending a larger subsidy, so that as a net, the state revenue will improve. As shown in Figure 5, the substitution of 50% of subsidized gasoline by gas (Scenario II) with gas prices 25% lower than the export price (Scenario P2), will reduce state revenue of Rp. 175.9 trillion to Rp. 171.4 trillion, but savings from subsidy spending of Rp. 14.2 trillion to make a net state revenue, amounting to Rp. 144.1 trillion, better than the net state revenue without substitution, namely Rp. 134.4 trillion.

50% Substitution & Gas Price = 75% Export Price 50% Substitution & Gas Price = Export Price 25% Substitution & Gas Price = Export Price No Substitution 0 20 40 60 80 100 120 140 160 180 200

25% 50% 50% Substitution & Substitution & Substitution & No Substitution Gas Price = Gas Price = Gas Price = 75% Export Price Export Price Export Price Net Revenue from Oil and Gas Fuel Subsidy 134.3 41.6 141.4 34.5 148.5 27.4 144.1 27.4

Figure 3 Oil and Gas revenue, fuel subsidy reduction with 25% and 50% gas substitution in transportation sector (2009) 4. Emission Reduction Fuel substitution by natural gas can reduce greenhouse gas emissions (CO2) emission because the level of CNG emissions is much smaller compared with the level of fuel emissions. Based on the Intergovernmental Panel on Climate Change (IPCC), combustion per MMBTU equivalents of oil fuel (Premium) is 73.09 kg of CO2, while natural gas/CNG produces less, i.e., 59.27 kg of CO2. Table 2 (a) shows the potential reduction in CO2 emissions projected in 2015 for Premium and Diesel substitution with gas for transportation sector, and Table 2 (b) for the substitution of diesel with gas in industry and electricity. As shown in the table, 25% substitution of fuel in the transportation sector (Scenario I) would reduce CO2 emissions by 4.82 million tons per year, and 50% substitution (Scenario II) would see 9.65 million ton CO2 emission reductions per year. Fuel Substitution Scenario III will provide a decrease in CO2 emissions that are much larger, namely (4.82 +12.88) = 17.7 million tons per year. 7

Emission Reduction (million ton CO2) Type of Oil Fuel Volume (million KL) 23,86 11,98 35,8 CO2 Emission (million ton) 57,59 34,29 91,88 Fuel Substitution (25%) 2,74 2,08 4,82 5,2% Fuel Fuel Substitution Substitution (50%) (75%) 5,48 4,17 9,65 10,5% 8,23 6,25 14,48 15,8%

Premium for Transportation Diesel for Transportation Total Reduction

Table 2(a) Projection of emission reduction (2015) due to gas substitution for fuel in transportation sector

Type of Oil Fuel

Emission Reduction (million ton CO2) CO2 Emission (million ton) 5% Diesel for 15% Diesel for 5% Diesel for Industry Industry Electricity + 15% Diesel for Substitution Substitution Electricity Substitution 29,27 47,19 76,46 1,62 1,62 2,1% 11,26 11,26 14,7% 1,62 11,26 12,88 16,8%

Diesel for Industry Diesel for Electricity Total Reduction

Table 2(b) Projection of emission reduction (2015) due to gas substitution for fuel in industry and power/electricity sector 5. Gas Demand Increase in Java By 2015, export volumes are expected to decrease from 4,200 MMSCFD (2009) to about 2,600 MMSCFD, while domestic consumption, as raw material for fertilizers/ petrochemicals and non-fertilizer industry, as well as electricity fuel, will increase from 2,800 (MMSCFD) to 3,200 MMSCFD, so the total gas consumption or demand is estimated at 5,800 MMSCFD. Geographically, about 1,700 MMSCFD or 30% of the projected total national gas demand is the gas demand in Java. Table 3 shows projected gas demand by sector and by 8 (eight) region - 'regionisasi' by definition of the National Gas Balance 20102025 - namely North Sumatra and Central (SUMBAGUT-TENG), Southern Sumatra (SUMBAGSEL), Java West (JABAGBAR), Central Java (JABAGTENG), Eastern Java (JABAGTIM), Eastern Kalimantan (KALBAGTIM), Celebes (Sulawesi), and Maluku and Papua (Maluku-Papua). As shown in Table 3, gas demand in the transport sector is still zero (marginal).

SECTOR

SUMBAGUTTENG

SUMBAGSEL 292 95 252 368 1,007

JABAGBAR 642 406 119 1,167

JABAGTENG 4 87 91

JABAGTIM 186 151 72 409 208 186 151 72 617 416 186 151 72 825

KALBAGTIM 57 11 518 435 1,021 42 57 11 518 435 1,063 85 57 11 518 435 1,106

SULAWESI 29 161 190 46 29 161 236 91 29 161 281

MALUKUPAPUA 2 1,052 1,054 2 1,052 1,054 2 1,052 1,054

TOTAL

Business as Usual (BAU) Transportation Industry 105 Electricity 58 Fertilizer 122 Export 551 TOTAL 836

1,288 837 1,083 2,567 5,775 938 1,288 837 1,083 2,567 6,713 1,877 1,288 837 1,083 2,567 7,652

Skenario I (25% Fuel Subtition in the Transportation Sector) Transportation 100 61 339 142 Industry 105 292 642 4 Electricity 58 95 406 87 Fertilizer 122 252 119 Export 551 368 TOTAL 936 1,068 1,506 233 Skenario II (50% Fuel Subtition in the Transportation Sector) Transportation 200 123 678 284 Industry 105 292 642 4 Electricity 58 95 406 87 Fertilizer 122 252 119 Export 551 368 TOTAL 1,036 1,130 1,845 375 Skenario III (25% Fuel Substitution in the Transportation Sector, 5% in the Industrial Sector, and 15% in the electrical sector) Transportation 100 61 339 142 Industry 105 292 822 6 Electricity 180 95 672 237 Fertilizer 122 252 119 Export 551 368 TOTAL 1,058 1,068 1,952 385

208 238 328 72 846

42 57 11 518 435 1,063

46 29 161 236

2 1,052 1,054

938 1,522 1,552 1,083 2,567 7,662

Table 3 National gas demand projection in MMSCFD for the three scenarios of gas substitution for fuel (2015) As shown in Table 3, substituting 25% of subsidized fuel in the transportation sector by natural gas, as shown in Scenario I, would raise the national gas demand, from 5,774 MMSCFD (BAU) to 6,712 MMSCFD, or additional requests (increment) 938 MMSCFD, while Scenario II (50% substitution) will an increased demand for gas to 7,651 MMSCFD, or increments of 1877 MMSCFD. Because the transportation sector is generally concentrated in Java, from the increase in gas consumption, about 73% represents the increase in gas demand in Java. Scenario I will raise the gas demand in Java to 689 MMSCFD and for Scenario II of 1378 MMSCFD/ per year. Scenario III will increase the demand for national gas to 7661 MMSCFD, or an increase of 1887 MMSCFD, about 80% are concentrated in Java. Thus, it can be concluded that all three scenarios of gas substitution for fuel will increase gas demand in Java Island about 700 MMSCFD (Scenario I), 1,400 MMSCFD (Scenario II), and 1,500 MMSCFD (Scenario III).

6. Gas Supply for Java Gas either for export or for consumption in the domestic market is supplied by gas fields already in production today. Figure 4 shows the projected supply and gas balance for the three scenarios of fuel substitution. In Scenario I, as shown in Figure 4 (a), the increase in gas demand both on the island of Java and Sumatra will be met by the supply of LNG from Kalimantan, which is 558 MMSCFD to 135 MMSCFD and Java to Sumatra. In Scenario II, as demonstrated in Figure 4(b), the increase in gas demand will be met by both the supply of LNG and gas through pipelines from Kalimantan, and LNG from Papua. Kalimantan will supply 271 MMSCFD of LNG to Sumatra and 630 MMSCFD of gas through a pipeline to Java, while 680 MMSFCD PAPUA will supply LNG to Java. Gas supply in Scenario III, depicted in Figure 4 (c), almost similar with with Scenario II, only the supply of gas/LNG from Kalimantan to Java relatively more volume, which is equal to 226 MMSCFD of LNG to Sumatra and 713 MMSCFD to Java through a gas pipe.

10

Export

Export

Export

Export

Export

Export

Export

Export

Figure 4 (a) Gas supply projection and national gas balance (MMSCFD) Scenario I substituting 25% of subsidized fuel in the transportation sector by natural gas (Ind/Lis/Tra/Pup stands for the demand for industry, electricity, transportation, and fertilizer)

11

Export

Export

Export

Export

Export

Export

Export

Export

Figure 4 (b) Gas supply projection and national gas balance (MMSCFD) Scenario II substituting 50% of subsidized fuel in the transportation sector by natural gas (Ind/Lis/Tra/Pup stands for the demand for industry, electricity, transportation, and fertilizer)

12

Export

Export

Export

Export

Export

Export

Export

Export

Figure 4 (c) Gas supply projection and national gas balance (MMSCFD) Scenario III substituting 25% of subsidized fuel in the transportation sector by natural gas, 5% of non-subsidized fuel in industry and 15% in electricity (Ind/Lis/Tra/Pup stands for the demand for industry, electricity, transportation, and fertilizer)

13

7. Gas Infrastructure Needs Table 4 shows the summary of demand and supply of gas, and gas infrastructure or transportation of gas (LNG or pipeline gas transmission) to the island of Java with the three scenario of fuel substitution. For Scenario I, the two LNG receiving terminals should be built, which is in Java and Sumatra to receive LNG supplied from Kalimantan, as well as gas transmission pipelines Semarang-Surabaya. Two LNG receiving terminals are also needed to be built in Scenario II, but LNG receiving terminals in Java and built to receive LNG from Papua hoard, not LNG from Kalimantan. In Scenario II, the gas pipeline transmission also needs to be built to drain the gas from Kalimantan to Java. Gas infrastructure needs in Scenario III is the same as in Scenario II, only the capacity of the LNG receiving terminal and gas pipeline transmission is relatively higher. In addition, for Scenario II and III, gas pipeline transmission also needs to be built to drain gas from/to the Cirebon-SemarangSurabaya and Semarang.
SUPPLY AND TRANSPORTATION MODE OF NATURAL GAS BAU MMSCFD Scenario I %BBGB MMSCFD 6.712 551 155 36 1.725 350 162 687 1.757 222 13 1.054 598 (71) 558 Scenario II %BBGB MMSCFD 7.651 551 168 36 1.725 350 166 687 1.953 268 13 1.734 630 531 (284) 137 680 Scenario III MMSCFD %BBGB 7.662 551 175 36 1.725 350 166 687 2.003 222 13 1.734 713 587 (336) 158 680

SUPPLY 5.774 Kep Riau / Natuna NAD Sumatra Bagian Utara Sumbagteng & Selatan Jawa Bagian Barat Jawa Bagian Tengah Jawa Bagian Timur Kalimantan Bagian Timur Sulawesi Bagian Tengah Sulawesi Bagian Selatan Papua Maluku Bagian Selatan GAS TRANSPORTATION MODE Gas Transmission Pipe Bontang-Semarang SumBagSel -Jawa Bagian Barat (SSWJ) Cirebon-Semarang Semarang-Surabaya LNG Tanker Kaltim-Jawa Bagian Barat Papua-Jawa Bagian Barat

Table 4 Supply and Transportation Mode of Natural Gas Scenario I, II, and III Gas infrastructure needs for Scenario II and III is a total cost of US$ 10.4 billion (IDR 94 trillion). As depicted in Table 5, in addition to gas transmission pipelines and LNG receiving terminal, fuel substitution by gas scenario also requires the construction of CNG depots and CNG filling stations in major cities, which will require about 30% of the total projected costs. For Scenario I, where fuel substitution is only 25% of transportation fuel needs, investment needs are estimated at US$ 3.3 billion (IDR 30 trillion) to build two LNG receiving terminals in North Sumatra and West Java, Semarang-Surabaya gas pipeline transmission, and the development of the CNG depots and filling stations, with a capacity of approximately half of the capacity of CNG depots and filling stations for Scenario II and III.

14

NO

GAS INFRASTRUCTURE ITransmission Pipe and Distribution Network a.Transmission pipe Bontang-Semarang b.Transmission pipe Semarang-Surabaya c.Transmission pipe Cirebon-Semarang d.City gas distribution network construction IILNG Plant, LNG Receiving Terminal, and Tank Fabrication a.FSRU - Belawan *) b1.FSRU - Muara Karang b2.LNG RT di Cilegon *) c.Capacity addition LNG Plant (Tangguh) d.2 (two) tanks fabrication IIIMother and Daughter Station a.Gas Stations and Facilities

AIM

CAPACITY

INVESTMEN T (Billion US$) 2,68 0,31 0,61 0,15 0,62 0,82 0,64 1,84 0,32

Gas Transmission Pipe Gas Transmission Pipe Gas Transmission Pipe Gas Transmission Pipe FSRU FSRU LNG RT Train LNG Plant Tank

1500 km 250 km 400 km 1000 km 1 unit 2-3 MTPA 1 unit 3-5 MTPA 1 unit 4,67 MTPA 1 unit 5,3 MTPA 2 units @ 160 ton

250 Mother Stations, Mother Station, Daughter 1500 Daughter Station, dan CNG Trucks Stations, dan 500 CNG Trucks

3,06 10,41 10,23

TOTAL INVESTMENT (option b1) TOTAL INVESTMENT (option b2) *) CNG = Compressed Natural Gas, FSRU = Floating Storage eceiving Unit, LNG RT = LNG Receiving Terminal **) Investasi untuk Skenario I = 30% dari investasi Skenario II/III

Table 5 Gas Infrastructure Transmission, LNG Terminal, and Gas Stations Total investment to build the required gas infrastructure is about US$ 10.4 billion (Rp. 94 trillion) for five years, or about Rp. 19 trillion per year. This investment includes 3 (three) major components: the construction of the gas transmission pipelines and gas distribution networks (36%), LNG plant and receiving terminal (35%), and CNG depots and filling station and gas transportation trucks (29%). In terms of sources of funds, state-owned and private enterprises are expected to invest more than 80% of the investment required, or about Rp. 75 trillion. They are also expected to build LNG Plant and LNG receiving terminal facilities, as well as some segments of the main transmission pipeline. The Government, through the state budget, will be more focused on building a distribution network and providing an enabling investment climate for the national gas sector. Investments by state-owned and private enterprises (Eighty percent of the total investment requirement, or Rp. 75 trillion) will require long-term debt finance of about Rp. 53 trillion, assuming that enterprises invest 30% equity, or about Rp. 22 trillion. The Indonesia Infrastructure Fund (IIF), which was founded in 2009, is expected to provide support to both the financial sector and enterprises (especially national enterprises) to obtain long-term debt finance. 8. Summary and Conclusion Utilization of natural gas for the domestic market can reduce fuel subsidies. By using the 2009 national budget data, a recent estimate indicates that 25% fuel substitution by gas in the transportation sector will reduce the burden of subsidy expenditure by 17%, and will reach 34% if the substitution is increased twice. In addition, domestic gas sales with prices below export prices will not harm or reduce the net state revenue. This is because the decrease in oil revenues is accompanied by a reduction in fuel subsidy spending. Moreover, this 25% fuel substitution in the transportation sector will reduce CO2 emissions by 4.82 million tons per year, and reaches 17.7 million per year if followed by 5% fuel substitution in the industrial sector and 15% in the electricity sector. The substitution of natural gas for oil

15

fuel requires large gas supply. Twenty-five percent fuel substitution in the transportation sector will raise the national gas demand to 900 to 1.000 MMSCFD, and reaches 1800-2000 MMSCFD if added with the substitution of 5% fuel for industry and 15% of fuel for electricity. Approximately 75-80% of this increase represents additional demand for gas in Java. The increased demand for gas in Java requires that a LNG receiving terminal in Java as well as gas transmission pipeline from Kalimantan to Java be developed. This is even more crucial if the increase exceeds 1,000 MMSCFD. If the increase is below that, building LNG receiving terminals to receive LNG supply from Kalimantan will be sufficient. The amount of investments needed to support the 25% fuel substitution in the transportation sector reaches US$ 3.3 billion (IDR 30 trillion). Total investment will be increased to US$ 10.4 billion (IDR 94 trillion) if the substitution of fuel is increased to 50% or if it is followed by a 5% fuel substitution in industrial sector and 15% in the electricity sector. A comprehensive plan needs to be formulated in order to have the fuel substitution in place. The plan as a minimum, has to address ways to strengthen the institutional set up of how the gas infrastructure is going to be systematically developed and several scenarios to improve business regulations for upstream, midstream, and downstream since the development of the gas infrastructure will heavily rely on private investment. A review of the existing policies is necessary, including gas pricing and consumer rules and regulations, while new policies need to be initiated aimed at expediting gas development by attracting private sector participation. Such an assessment will need to focus on the complementary advantages of both the Government and State owned and private enterprises. Balancing the risk/reward structure is an essential element of such an assessment. The local and national government, as the owners of the gas resources, have a natural role in taking a larger stake in providing resource risk guarantees, with the private sector investing in exploitation, transmission and distribution. The business environment has to be improved by establishing sound rules and regulations for private sector participation in upstream, midstream, and downstream gas development and financing. This needs to include a review of the necessary gas provision allocations in the Production Sharing Contracts (PCS) for the development of midstream and downstream infrastructure. Increased financial transparency through, among others, the development of comprehensive financial models, which allow for the transparent pricing of risks and allocation of rewards, will be a requirement to create conducive gas sector investment climate. Finally, identifying gas infrastructure project packages that are technically and financially feasible and ranking them economically will be of primary importance, taking domestic policy priorities into account. These packages should take into account, not only the use of Natural Gas, but also of modern and further advanced applications such as large scale biomass methanization for use in transport and electricity production, and the utilization of Coal Bed Methane (CBM). Moreover, prioritization of gas infrastructure project developments must be following a least-cost investment scenario to be based on fossil fuel forecasts over medium to long term (20 - 50 years) perspective to eliminate the potential for gas shortages in the production and delivery system.

16

References Groenendaal, Willem J.H., The economic Appraisal of Natural Gas Project, Oxford University Press for Oxford Institute for Energy Studies, 1998. BPH Migas and Ministry of Energy and Mineral Resources, Open Access to Indonesia Gas Networks, Prepared by Peter Cameron Mercados Energy Markets International, 20 April 2007. Peter Cameron, Development of The British Gas Industry Finding new path for the energy market, Jakarta, Indonesia, Mercados Energy Markets International, 16 March 2007. Price Water House Coopers, PGN Restructuring and Privatization Study Report on Unbundling and Open Access, 26 July 2006. PT Perusahaan Gas Negara (Persero) Tbk, Confidential Final Report, Gas Pricing and Utilization Study, Nexant, September 2006. BAPPENAS, Gas Transportation Project Through Public-Private Partnership TA No. 4360INO, Final Report Volume 1, 2, and 3, Softregaz and Pendawa Consultama Sejati, August 2005. .

17