Montty Girianna, Jakarta

If we ask ourselves about where our country's energy future lies, the likely answer is in natural gas. It can generate electricity, fuel vehicles, cool homes and places of business and be used as a raw material in a number of fertilizer products.

Gas is also a substitute for oil. Oil resources, once thought plentiful, are being depleted and won't last forever. With Indonesia's oil resources being drained the country recently became a net oil importer. Oil, once thought cheap is becoming expensive, as witnessed when world oil prices skyrocketed last year.

The impact is crystal clear. Subsidies for oil products, which induce further reliance on imports, have become a tremendous burden to the state's budget. This may further strain the nation's economic and political strength on the world stage.

Our gas market has recently evolved. Although Indonesia's natural gas reserves are among the highest in the world, its domestic gas consumption is among the lowest. Many obstacles exist that prevent the rapid development and expanded utilization of gas in the nation's market. These include its energy pricing policy, gas development and investment in upstream and downstream infrastructure.

Oil products, which may be substituted by gas, are cheaper than natural gas products. At the same time, the price of natural gas was itself below its true economic value. This resulted in the development of the gas market being hindered by its producers. Natural gas was thus not able to penetrate the energy market owing to domestic fuel prices, which were substantially lower. We most definitely need to rationalize overall energy prices.

More than 90 percent of the country's oil and gas is produced in the private sector, chiefly by international oil companies. Investment is almost completely governed by production-sharing contracts (PSCs). Most of the fiscal and non-fiscal PSC terms are in line with international practice. However, many existing contracts still do not have provisions for gas exploration and as a result there is no predictable basis for forecasting the value to producers of domestic markets. We need to resolve such issues that hinder the development of gas markets.

Also, we have to face the reality that great distances exist between most of our gas reserves and gas demand centers. We do not have a sufficient upstream and downstream gas network (infrastructure for the transmission and distribution of gas). Only 1,000 kilometers of transmission piping and 3,000 km of distribution piping currently serve six cities in the country -- an impediment than could further limit our domestic gas growth. We also have problems with our regulatory framework and have insufficient funds to develop adequate infrastructure for gas distribution.

The nature of our gas industry has recently changed. Domestically, the reduction of fuel subsidies has eased fluctuating fuel prices, making natural gas more competitive as an energy alternative. Growing energy needs in Java and Bali will spur demand for domestic gas. We need more electricity, (approximately another 20,000 MW), to maintain society until 2015. A great deal of this demand will be satisfied by natural gas.

Today, gas consumption in Java accounts for less than 20 percent of Indonesia's domestic demand (close to 1,200 million cubic feet per day [MMSCFD]), which is slightly less than the outer islands where there is a concentration of industrial and fertilizer plants. In the future this figure will increase by between 6,000 MMSCFD and 7,000 MMSCFD and account for half of national total demand. These forecasts will bring definite opportunities to natural gas producers in the domestic market, even in light of the diversification of the international liquid natural gas (LNG) market.

New international producers of natural gas are challenging our leadership in the global LNG market. Our position, in which we supply almost 26 percent of the world's LNG, is in danger, and revenue derived from gas exports -- about 10 percent if our total export revenue -- is also under serious threat.

Japan is currently our largest export market with a commitment to approximately 18.5 million ton of LNG per year. This is followed by Korea, which has a 5 million ton per year commitment, and Taiwan, which has a 3.5 million ton commitment per year. A large number of gas contracts will end in 2010, leaving approximately 9.5 million tons of LNG per year available for sale. This equates to around 50 percent of our current gas exports to Japan.

The development of natural gas has contributed considerably to our macroeconomic stability. Our economy has been improving since 2002. After periods of fluctuation our foreign exchange reserve now registers a steady increase. From approximately US$29.4 billion in 2000, our reserve dropped to $27.5 billion in 2003. It then reached $36.3 billion in 2004. In the first quarter of 2005 it decreased to about $30.3 billion.

Besides foreign exchange rates, our reserve fluctuates depending on the volume and value of exports and imports. One of the sources of our reserve is the value of oil and gas exports. Such natural resource-based exports constitute a significant portion of the national current account. In 2005, such exports contributed approximately 22 to 25 percent.

Our energy prices have been rationalized and the domestic gas market is being restructured. Full removal of oil subsidies, however, will require more time and the substitution of domestic gas for imported fuels will contribute to resolving fuel price distortions. Promoting gas use and implementing a rational gas pricing policy must be further enhanced. This should become a central part of the nation's strategy to reduce its reliance on oil products and phase out subsidies.

Issues corresponding to contracts that have no provisions for gas exploration must be immediately resolved. For existing contracts, any change in terms and conditions must be mutually agreed upon. With respect to new contracts, one must rely on the oil and gas laws and other regulations aimed at creating a competitive environment that provides producers with direct access to consumers.

A greater government role is needed in promoting investment in high-risk, large-scale upstream gas projects, such as export-oriented gas pipelines and LNG facilities. The government must help reduce risks by intensifying dialogue and developing relevant inter-governmental agreements. These agreements must overcome the overarching legal jurisdictions that regulate activities and contracts. In addition, the government must commit to implementing prudent and transparent revenue management frameworks to avoid mismanaged revenue from gas production.

The government has neither the financial or technical capabilities to ensure the successful exploration and production of viable gas reserves. The development of upstream and downstream networks is capital intensive. Investors, both domestic and international, will have to contribute a growing share of investment for upstream and downstream networks. Their participation must be encouraged, not only because private sectors can provide capital, but also because they can enhance efficiency and innovation.

Lastly, it must be in the government's interests to fashion strategies that promote the creation of regional gas markets through LNG and export-oriented pipelines. Careful thought must be given to ensure this is not in conflict with the fulfillment of the domestic demand for gas. The endorsement of dedicated gas developments for export should be carefully assessed in order to ensure that the ultimate aim of increasing and strengthening our foreign exchange reserves is maintained.

The writer is the director for energy, mineral resources and mining at the National Development Planning Agency (BAPPENAS). The views expressed here are his own.

Source: Jakarta Post